Financial markets can be many things, but consistency of thought is not always it’s finest trait. For example, it’s not uncommon to see different reactions from the bond market compared to the stock market on different issues. And in the latest session on Wall Street, it was the differing reaction by equities compared to FX in relation to the upcoming FOMC meeting that was a little puzzling.
Essentially, we had US equities falling because of fears that the Federal Reserve will be too aggressive when raising rates, and at the same time in the currency market we had the USD falling on expectations that the central bank will signal a pause regarding the rate-hike cycle when it meets later this week. Contradictory signals? It seems that way.
We will need to wait until the FOMC press conference to see whether the equities or the currency market had it right today. But the confusion over whether the Fed will take a dovish or hawkish view explains the trading patterns of the day.
Adding to the uncertainty over the FOMC outlook was this tweet from President Trump today:
Of course, the US Federal Reserve is an independent body, but one wonders whether political pressure will influence the decision- making process at any stage? An official response to this hypothetical question would undoubtedly be a stern “no”. But the dynamic between the FOMC and the President concerning the differing attitude toward Monetary Policy adds at the very least a further shadow of doubt over the interest rate outlook for 2019.
In market action, we saw the USD lose ground against most of the other majors on anticipation that the Fed may take a slightly more dovish stance at the upcoming meeting. As a result, the Euro gained around 0.4% to trade in the mid 1.13’s, but in the bigger picture the EURUSD rate remains locked between support at 1.1290 and resistance at 1.1460. However, the FOMC event later this week could be a catalyst for not just the Euro but other currency pairs to break out of their recent familiar ranges, depending on what tone the Fed takes.
Sterling had a good day by rising 0.3% against the USD and was back above the 1.26 handle late in the New York session. But while the GBPUSD moved higher for the day on Dollar weakness, the upside remains capped while Theresa May struggles to break the stand-off with the EU over the troubled draft-Brexit deal. The UK parliament is expected to have a vote on the draft deal in mid-January.
Elsewhere, the USD slipped half a percent lower against both the Yen and Swiss Franc as these two currencies were favoured from a safe-haven point of view during the session. Meanwhile the AUD was unable to take advantage of a faltering USD, with the recent disappointing Chinese economic data still weighing on the Aussie. This kept the AUDUSD rate trading at the sub $US0.72 level.
Finally, crude oil succumbed to the risk-averse mood on the market, with the WTI contract settling below US$50 per barrel with traders jittery over both the upcoming FOMC meeting and weak growth signals around the globe. We expect that the oil market is in for more choppy trading at least until the OPEC production cuts take effect from January 1st.
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Soaring US yields trigger the wrecking ball effect as yields become a source of volatility for risk, rather than a source of support