Dollar Hollar: USD Bid Ahead Of FOMC Minutes
Dollar Hollar: The FOMC releases minutes of the December 15th-16th meeting later today. On the day of the FOMC decision, alongside the 25bp rate rise the committee released fresh forecasts for growth and inflation, a new “dot plot” Fed Funds rate chart, a new technical implementation note, and Chair Yellen held a press conference explaining the Fed’s decisions in detail.
With that plethora of information already released, the minutes may not add much new to the conversation. But the market will be looking specifically for language on inflation. We think the FOMC put a greater emphasis on the actual path of inflation and less of an emphasis on the expectation of future inflation gains signaled by a tightening labour market, which was the key factor in determining the timing of the first rate rise. Similar to the press conference tone and the statement language, we do not expect the path of the Fed Funds rate to be discussed in specific terms – the language may instead simply point to broader “data dependence.”
With respect to the data dependent nature of the FED it is worth mentioning concerns regarding Q4 real GDP with many economists cutting forecasts to coalesce around a probable 0.5% print , a percentage point cut from the previous forecasts with many market participants sensing that even this reduced read might be too high in light of what could be a much larger inventory liquidation than has previously been thought. The reduction in expectations also has a read through the Q4 over Q4 comparison declining by 30bps to one point seven percent, this softness in expectations will likely have a roll over effect into this quarters expectations, with economists positing growth of 50bps to a one point five percent projection. The catalyst for the walk back in expectations for Q4 and this Quarter are based on weakness in the data from the US over the past four to five weeks, misses in the data from Manufacturing ISM, construction, trade and durable goods.
The US data session kicks off firstly with the December ADP employment change print, followed closely by the November trade balance. The final December services and composite PMI’s follow this before we get the all-important ISM non manufacturing where market expectations are currently sitting for little change at 56.0, although US economists are less optimistic and expect a drop to 54.0 (from 55.9). November factory orders data along with the final revisions to durable and capital goods orders are also due out before we get the aforementioned FOMC minutes at 7pm GMT.
Before jumping into the charts it is worth restating the view I expressed into the end of 2015. From a historical perspective it is important to note history suggests the USD weakens once the Fed starts to hike rates.
In addition, with the current softness in domestic data underpinned by concerns regarding global growth expectations spearheaded by the crumbling of Chinese equity markets having repercussions globally, it is likely the conversation about the pace of Fed hikes will retain a very dovish tone in 2016, mirroring the experience of other central banks which have tried to raise rates after the 2008/09 financial crisis. Obviously Friday’s Non farm payrolls data will be key in defining the extent of the dovish rhetoric, a strong print Friday wll keep the hawks in the driving seat for now.
Technical & Trading Takeaways
We continue to map the Bullish USD scenario the probable path of price as highlighted in the charts below was my favored scenario, being long against 97.00 is the trade I recommended in recent reports and is playing out near perfectly and is currently running 200pips of profits. The FED delivered as such I anticipated a push higher to test a minimum upside objective of 102.00/104.00 it is from this area I will be monitoring intraday reversal patterns to venture short for a move to retest the apex of this years consolidation zone at .9500 as per the chart below.
If holding longs from the 97/97.50 level I would counsel moving to risk free on this trade as the USD is susceptible to volatility around Friday’s NFP release a big miss could see a sharp pull back in the USD as rate expectations fall off rapidly. For now price action is mapping well and I maintain longs targeting the 102 minimum upside objective.
Remember probabilities suggest thrusts from prolonged consolidation prove terminal in the near term as too many market participants chase price action at poor locations. I am not suggesting a termination of the trend but more that this structure would provide a better trend entry after a shake out of poorly positioned players.
For updates on trade of the day set ups and the other trades I am currently monitoring be sure to follow me on Twitter @LFXPatrick