Monday, December 17, 2018

Fed's interest rate decision and forward guidance the key theme of the week

Tags
  • Dollar
  • Gold
  • Yen
  • Euro
  • Pound
  • Stocks

MORNING BRIEFING

The Dollar starts the week on a positive tone but it may not end it in a similar mood. The US currency will be at the forefront in light of Fed's interest rate meeting mid-week and the stakes are high regarding the central bank's decision and forward guidance. Gold succumbed to Dollar's rally, equities look poised to correct from Friday's losses and Oil continues to consolidate.

Fed's meeting on interest rate policy will be the key event of the week ahead. The US central bank is widely anticipated to raise rates one more time this year, to bring its total to four, but its outlook on the US economy and its forward guidance regarding next year's policy will be the material takeaway. Earlier in the year, the Fed was expected to keep raising rates at a steady path throughout 2019; however, over the recent months the series of downbeat US data, the continuation in the trade dispute with China, the selloff in equities and fears of a potential global slowdown are casting serious doubts on whether the Fed can keep up their hiking schedule.

As such Wednesday's meeting is crucial in dictating the Dollar's outlook for the next year and obviously its price action during the last days of 2018. Given the bearish tilt in both domestic and external market conditions the Fed is very likely to signal a slowdown in its hiking cycle, potentially hinting on one or two hike increases in 2019. This would signal a material change in its forward guidance and traders will look to adjust to it. Already, money managers' positioning in assets like Gold is changing according to a report from Bloomberg: for the first time in 5 months, long positions on the yellow metal outnumbered short ones in anticipation of a slower Fed hiking path that may send Gold's prices significantly higher.

So which instruments would benefit from such a turn of events? Here comes the tricky part as one would naturally presume that both the European and the commodity currencies would benefit from a more cautious Fed policy, right? Not so this time. The Euro and the Pound face their own domestic troubles with unrest in France and uncertainty in Italy battling Brexit developments for headlines every day; while the commodity currencies are so closely correlated to China's growth pace that are feeling the pressure from the Asian giant's slowdown. What we can deduce though is that the Dollar's rally may be coming to an end and investors may be better served trying to sell any bullish rallies as soon as its trend switches to the downside. And that Gold may shine in 2019.

Commodities kept to the same themes on Friday. Gold broke to the downside to hit $1,235 and even though it recovered slightly it still points lower in the short term. A significant support lies around the $1,230 level and given the uncertainty surrounding the Fed's decision later this week investors may sit on the sidelines allowing prices to test this level before a rebound may be seen. Oil hovers around $52 with small rallies above and below this level and we may have to be patient until the OPEC productions cuts come into effect for a significant move higher.

Equities were deep in the red on Friday amid fears of a global slowdown on the back of disappointing figures coming from China. However, this morning the futures on both sides of the pond are pointing higher suggesting that equity traders may be hoping for something. Indeed, a potential shift in Fed's policy would be beneficial for stocks but would it be enough? Most likely not, at least not in the long term. If global growth slows down investors will look for shelter in fixed income securities and equities may be in for another leg lower. In the short-term though, the week starts positive ahead of the Fed meeting so we should be in for a bullish opening bell.

MARKET EVENTS TO WATCH

  • Euro-Zone Consumer Price Index – 2pm
  • US NAHB Housing Market Index – 7pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research