The FOMC raised rates as expected but the statement and addendum had markets moving. Is your favorite asset one of them?
FOMC Rate Hike Moves Markets
The FOMC raised interest rates on Wednesday by a quarter point. The move was not unexpected, the market had priced in a near 100% chance of such an event, and yet the dollar strengthened anyway. What happened to move the market? A more hawkish than expected tone and details into the upcoming asset reduction program. While a hike had been expected at the June meeting the Fed was also expected to back off their hiking timeline, which they didn’t, and not to give details on the balance sheet reduction, which is also slated to start earlier than expected, and both details lent strength to the dollar.
The FOMC is not the only central bank responsible for the dollars strengthening. The ECB laid the foundation for a Dollar Index rebound and reversal last week when they held rates steady. While that move was also expected, the bank did not deliver on hawkish expectations that set the two banks for a divergence in policy that is weakening the euro at the same it’s strengthening the dollar.The EUR/USD is retreating from resistance at the 7 month high and has been in near-term down trend since the ECB meeting earlier this month. The pair is approaching first support targets in the 1.1130 range but could easily fall through unless economic data alters present outlook and there is very little data expected over the next 10 days.
Adding to dollar strength are decisions by the Bank of England, the Swiss National Bank and now the Bank Of Japan. All three have decided to keep rates steady in support of economic growth with little to no expectations for tightening in the near future. BOJ Governor Kuroda made it clear the bank was in no hurry to begin tightening and that it was “inappropriate” to begin talking taper any time soon. This move led the yen to fall to a 2 week low. The USD/JPY has reversed from the 109 level and moving up to first resistance targets near 114.50.
Gold prices reacted as well. The metal is closely tied to the value of the dollar and has begun a reversal of its own. Spot gold fell from the $1,280 level down to tentative support targets between $1,250 and $1,260. Support is present in the form of safe-have demand driven on global political uncertainty and will likely add volatility to the trade as well. Short to long term gold prices are moving lower within trading ranges with downside targets at $1,250, $1,235 and $1,220.
Equities markets are moving as well but the FOMC is not to blame. The central bank may have induced volatility but short and long term direction is being driven by economic and earnings outlook both of which are positive. The equities market has entered a period of consolidation and sector rotation following one earnings season and before another. The 1st quarter earnings season was much better than expected with growth in excess of 12%. The next season is expected to produced growth as well, possibly as high as 10.5% if results hold to trend.
The next opportunity for major market moving news is in just over two weeks. This will be the June NFP and unemployment data and another chance to surprise the market. If the number continues to be weak it could damper bullish spirits and depress markets. If however it rebounds from two months of the tepid growth it could unleash the running of the bulls.