The FED’s «patience» has supported the markets this year. But yesterday the same mood led the retreat of stocks and raised the dollar, as the markets were set for further softening of the rhetoric.
The Federal Reserve, as expected, did not change the policy and disappointed the stock markets, noting that does not see needs to change the policy in any direction in the near future. Moreover, in its comments, the Fed noted that it retains confidence in the economy and expects inflation to rise due to a strong labour market. This caused a jump in the dollar by 0.6% and took away more than 1% from the S&P 500. This is a contradictory signal for the markets and a positive one for the dollar.
On Thursday morning, futures for US indices are carefully recovering against the background of optimism around the economy. But as for the dollar and debt markets, there is a lot of room for manoeuvre as market participants are pricing in one rate cut in the next 12 months. From now they may start seriously adjust their expectations. The development of this scenario will cause the growth of long-term bond yields, strengthening the dollar purchase.
Another important point is the standoff between Trump and the Fed. As expected, on the eve of the meeting the U.S. President noted that the economy could go “up like a rocket” with the help of lower rates and quantitative easing. Trump noted that in this case “the national debt will look small.” This is possible with the much lower dollar, which would seriously question the financial stability.
Therefore, the “patience” of the Fed, in this case, should be taken a stoic calm, which can return confidence to the dollar.
ILLUSTRATION
S&P 500 declined from historic highs by 1.5% by the end of trading on Wednesday, offsetting all growth gained from the end of last week. On Thursday, there are cautious purchases of stocks.
The wait-and-see approach of the markets may persist until the release of Friday statistics on the labour market. The data released this week form a contradictory picture. Very strong employment growth of +275K by ADP vs expected 181K. Manufacturing ISM fell from 55.0 to 52.8, to a two-and-half year’s lows.
ILLUSTRATION
The Fed’s patience has stopped the EURUSD growth in one step from the 50-day MA and returned it to levels under 1.1200 at one point. On Thursday morning, the pair demonstrates growth attempts, trading at 1.1210. Traders should remain cautious, as there is still a number of important data that can affect the course of trading on the foreign exchange market, including the BoE’s MPC decision and the U.S. statistics.
