Fundamental Analysis

Fed Talks And Brexit Headlines On The Radar

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The Fed hiked, the dollar tumbled, equities received a boost, and the yellow metal shined.

This isn't a price action one would expect when the central bank of the largest economy raises interest rates. However, messages sent to markets from monetary policy makers before Wednesday's meeting led investors to believe the central bank will not only raise interest rates but also accelerate the pace of tightening. This missing part of the equation 'acceleration of tightening' was enough to send the U.S. dollar into a U-turn, and global stocks to fresh record highs.

For dollar traders I think the week ahead will be somewhat challenging. But given the steep decline in the USD on Wednesday and Thursday, any further drop should be rather limited. The Fed might be less hawkish than what was previously thought, but let's not forget that it's the only central bank raising rates when all other major central banks stand pat.

The economic calendar is relatively light; nonetheless, investors will have the chance to get more clarity from FOMC members. Many Fed policymakers are due to speak, including four voting members, but I'll be most interested in what Janet Yellen has to say on Thursday at the Federal Reserve System Community Development Research Conference in Washington and what Minneapolis Fed president Neel Kashkarihas to say as the only dissenter from the decision to raise rates.

Once the noise surrounding the monetary policy dissipates the focus will return to fiscal policies. Equity markets have been clearly driven by animal spirits in the last couple of months and might continue to be the case in the short run. However, given the slow progress in implementing tax cuts and infrastructure spending plans, markets will soon realize that they are ahead of themselves and I'm still quite confident that U.S. protectionist policies will do more harm than good.

In the UK, Theresa May is expected to start the process on Brexit any time soon. Sterling is still holding tight, thanks to the Fed neutral hike and BoE's Kristin Forbes who voted for a rate hike. With inflation on the rise some MPC members believe that a rate hike would be needed sooner than later, but how many MPC members will join Ms. Forbes remains uncertain. Brexit headlines will become the major force moving the pound the days ahead, and the harsher stance EU takes the more pressure might be felt. However, given the shift in monetary policy expectations the downside in the pound is likely to remain limited for now. On the data front, UK will release February's inflation data on Tuesday and retail sales on Thursday.

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