Wednesday, September 26, 2018

Here's why Fed's decision today could be pivotal for currencies and equities

Tags
  • Dollar
  • Euro
  • Pound
  • Stocks
  • Federal Reserve

MORNING BRIEFING

Wednesday is finally here and the FOMC interest rate decision, a potentially pivotal event for currency and equity markets, is just a few hours away. The US central bank is concluding its two-day meeting today and late in the evening they will announce their interest rate decision and Jerome Powell will host his usual press conference. However, it's not the rate decision that will keep investors at the edge of their seats as this is pretty much known by now.

We know that the Fed will raise interest rates today for the third time this year encouraged by the progress of the domestic economy. What will be more interesting to understand though - and this will be the key takeaway of today's meeting - is how optimistic Jerome Powell will be regarding the state of the US economy and its resilience against external, geopolitical factors. His forward guidance remarks and more importantly his tone will dictate the price action for the Dollar and the equity markets on a global level.

The intriguing thing regarding today's meeting is that Powell and the Fed have reasons to err on either side of the argument: the domestic economy has been very strong over the past few months, underpinned by robust labor market growth and rising wages. On the other hand, Donald Trump's trade wars are taking a toll on the US economy, with pockets of weakness already visible on sectors like manufacturing; but more importantly this climate creates a sense of uncertainty that the Fed has to take into account.

Eventually, the combination of these factors will force Powell to either remain optimistic and signal that the Fed stays on course for another hike in December or send a more cautious, reserved message that will hint on the central bank being unsure whether more tightening is appropriate soon. All bets are off at this time and depending on which message investors receive today the Dollar will either reverse course and start rallying again or take a backseat and retreat deeper. All the major instruments are holding steady this morning and with no other important news or reports pending for release we should see choppy price action leading into the meeting tonight.

For the Euro, a hawkish Fed bias will drive prices towards the 1.17 area for a slight correction, as the market is increasingly supportive of the shared currency's outlook but a bearish Powell will push the Euro above 1.18 en route to the 1.1850 area. For the Pound, 1.3050 is the support in case of a Dollar rally and 1.33 the ceiling if a cautious tone comes out of the FOMC remarks. Finally, Dollar/Yen is hovering around 113 which suggests that more Dollar strength will clear the path towards 114 while a sell off for the US currency will point prices towards the 112 area.

Commodities are trading sideways this morning with market participants focused on the FOMC meeting and Dollar's direction on the back of tonight's event. Gold is hovering around the $1,200 area and its price action will depend on how Dollar trades: the support lies at $1,190 but things could get a lot more interesting if a cautious Powell forces the greenback lower and sends Gold's prices above $1,210 towards the $1,230 area. Oil is holding above $72 this morning even though we noticed a slight correction during yesterday's session; as discussed earlier this week, as long as prices remain above the $71.50 support we stick by our optimistic view of Oil hitting $73-74.

Equities in Asia are trading with a positive bias this morning following a mostly positive day for the European bourses on Tuesday while their US counterparties ended the day mixed. Investors seem unfazed by Trump's fresh tariffs and his intention to escalate matters even further after China's response and futures in Europe and the US are trending higher this morning. Could it be possible that investors are hoping that Powell sends a bearish message today, signaling a slower rate hiking path that would do wonders for the US equity markets? It remains to be seen.

MARKET EVENTS TO WATCH

  • U.S. Crude Oil Inventories - 6.30pm
  • FOMC Rate Decision - 10pm
  • Fed's Powell Holds Press Conference Following FOMC Decision - 10.30pm

All times are GMT +4.

Written by Konstantinos Anthis, Head of Research

 
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