More Hawkish Fed Sends Dollar Tumbling

Analisi Giornaliera - 28/07/2016

FOMC Signals That Risks to the Outlook Have Lessened Raising Speculation of 2016 Action

Although opting to keep monetary policy unchanged and leaving interest rates on hold at 0.50%, the latest FOMC Statement underlined the brighter outlook as evidenced by reduced risks amid a shift in the language used to convey the economy’s strength. The more hawkish view raises speculation that the gradual pace of rate increases might mean another move on rates before the end of the year.

FOMC Statement Sends Dollar Lower, Gold Higher

While it was no shock that the Federal Reserve took no action during its latest two-day meeting, the FOMC Statement itself gave several important clue about the future of policy after displaying a progressively more hawkish stance. The key aspects worth mentioning include the diminished “near-term risks” to the outlook alongside a strengthening labor market and moderate economic expansion. The economy is also expected to continue growing, helping to raise the probability of a rate hike before the end of the year. Even though Fed Funds futures are only pricing in a 46.40% probability of a rate hike before the end of the year, Kansas City Fed President Esther George dissented during the decision, believing that a 25 basis point hike was indeed warranted. While the dollar did not buy more interest rate normalization, losses propelled gold higher, with the yellow metal trading just shy of $1340.00 per troy ounce.

UK GDP Handedly Beats Expectations

Ahead of next week’s Bank of England Monetary Policy Committee decision, the latest data on the UK economy continues to surprise analysts after gross domestic product managed to rise well past estimates. Expectations of 0.40% growth during the second quarter were outperformed according to the Office For National Statistics, with the preliminary estimate exhibiting 0.60% quarterly growth and a 2.20% annualized pace of expansion. While there are two more revisions ahead, this is a strong sign for the economy which has been hampered by weak construction and housing fundamentals in the lead up to the referendum. The slide highlighted by last week’s preliminary manufacturing and services PMI figures struck a darker tone, putting the probability of policy easing at a near certainty. After trading mostly flat against the Euro for the prior three sessions, the Pound is ceding ground once more, with the EURGBP pair rising back above 0.8400.

Crude Oil Drop Accelerates After Unexpected Build

A surprisingly inventory build announcement by the Department of Energy’s weekly Energy Information Administration report sent WTI and Brent crude oil futures tumbling, once against raising concerns about the pace of onshore storage filling. According to the release, 1.671 million barrels of crude were added to US inventories last week, reversing 9-straight weeks of declines. Aside from crude, gasoline stockpiles rose by 452,000 barrels while Cushing storage facilities saw another 1.110 barrel climb, adding to anxiety about the state of market oversupply. With demand during the second half of the year projected to be significantly below peak summer levels amid production that remains steadily above, the stage is set for a further downturn in oil prices unless there is another round of supply disruptions that offsets rising inventories. Brent crude oil remains under pressure after falling to the lowest since April during yesterday’s session.

Yen Remains Volatile Amid Mixed Stimulus Expectations

With the Bank of Japan meeting tomorrow to determine the next stage of monetary policy in Japan, expectations are running high, with any news hitting the tape generating significant volatility. Estimates are swinging wildly between the top end of the stimulus range which is an additional JPY 20 trillion and the bottom end which is JPY 10 trillion, giving credence to the idea that the upcoming policy decision is expected to show some form of expanded quantitative easing. Desperate to reverse the deflationary slide, Central Bank officials and government policymakers are forecast to shake things up with a combination of monetary and fiscal stimulus. While no decision has yet been made on fiscal stimulus, which is expected to be approved early next month, the recent weakening in the Yen over the last few weeks since the election has rapidly reversed, with the USDJPY pair falling back below 105.00.