- Yellen likely to continue to plead ‘patience’
- ‘Transitory’ effects of Crude and USD back in focus
- Employment data mixed, wage inflation remains a concern
- Dots still favour mid 2015 move but players starting to second guess
- Statement language focused on softer inflation – doveish development
- Statement language focused on looking past near term data – hawkish surprise
- Net net, USD longs remain the best bet
The FOMC (Federal Open Market Committee ) holds its first meeting for 2015 starting on 27th and concluding on the 28th January.
At the December gathering, officials viewed the decline in crude prices and the USD strength as ‘transitory’ effects, hinting that they would remain on course to start normalising policy without an up tick in core inflation on the basis they were confident of the potential for near term increases.
Economic data since the last meeting has been less than stellar, Both ISM surveys declined last month, and the December retail sales report was a significant disappointment. But growth remains solidly above trend heading into the January FOMC meeting, with GDP tracking at 3% in Q4.
Fed officials appear to be of the view that the US economy is on target to deliver 3% growth in 2015. The decline in oil prices should act as a shot in the arm for the consumer and an uptick in real income growth should help stave off any negative impacts from the more robust USD and any drag from weaker global growth concerns.
The market seems less convinced by this position as such believes that support of this position will reduce into the middle of the year with some FED members already alluding towards the fragility of a mid 2015 move. This notion is further underpinned by Chair Yellen’s call for patience with the committee on hold for at least the next two meetings.
“Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy, particularly if projected inflation continues to run below the Committee’s 2 percent longer-run goal, and provided that longer-term inflation expectations remained well anchored.”
Although on a headline basis US employment data has improved, one of the core concerns for the FED will be continued lack of positive momentum with respect to wage growth, the lack of upside development in wage growth coupled with bass effects year on year will likely see core inflation fall short of the FOMC’s 2% mid 2015 expectation. It is likely that the members will address concerns around inflation during the current meeting.
The timing of the first move towards normalising monetary policy will be closely eyed, the market remains of the view that the June target is still favoured, there is already a strong murmur in the market from many players that the June call maybe premature and more likely time for lift off would be at the earliest the September meeting.
Here at LFX a useful tool we like to take advantage of for a quick perspective of Feds Fund Rates forecasts is the CME group’s Interest Rates Implied Probability product, this tool gives a great read on the markets perspective of the likelihood of Fed Funds rates and actions over the next 12 months.
Net net The market appears to be positioned for a FOMC statement that will reflect the FOMC’s commitment to staying with its current course, with a focus on ‘patience’ as urged by Chair Yellen in the December session
Probabilities suggest the potential for a slightly more doveish takeaway from the January statement with a reliance on the virtues of patience. In light of the recent data set it would seem that the statement will have language that reflects continuing concerns regarding inflation and the potential for a continued near term declines. The market will keenly monitor the strength of this language as any renewed focus on a softer outlook will be deemed as a more doveish than expected development, while a weightier focus on the transitory effects of recent data and a heightened willingness to look past this data would be a more hawkish than anticipated development.
So what’s the trade…
The balance of probabilities and positioning suggest that traders will be best served sticking with a long USD portfolio. As such we are tasked with looking at some premium entry opportunities to this trade via the FXmajors
Some key levels to watch on a USD a near term USD retracement post the FOMC
EURUSD Resistance 1.1450/1.1550
GBPUSD Resistance 1.5350/1.5450
USDJPY Support 115.50/116.00