News & Analysis at your fingertips.

We use a range of cookies to give you the best possible browsing experience. By continuing to use this website, you agree to our use of cookies.
You can learn more about our cookie policy here, or by following the link at the bottom of any page on our site.

0

Notifications

Notifications below are based on filters which can be adjusted via Economic and Webinar Calendar pages.

Live Webinar

Live Webinar Events

0

Economic Calendar

Economic Calendar Events

0
Free Trading Guides
Subscribe
Please try again
EUR/USD
Bearish
Oil - US Crude
Bearish
Low
High
of clients are net long.
of clients are net short.
Long Short

Note: Low and High figures are for the trading day.

Data provided by
Wall Street
Bearish
Low
High
of clients are net long.
of clients are net short.
Long Short

Note: Low and High figures are for the trading day.

Data provided by
Gold
Bearish
GBP/USD
Mixed
Low
High
of clients are net long.
of clients are net short.
Long Short

Note: Low and High figures are for the trading day.

Data provided by
USD/JPY
Bearish
More View more
Real Time News
  • Take a closer look visually at the most influential global importers and exporters here: https://t.co/G58J1dg6y3 https://t.co/fGi6YgqqQt
  • What suits your style of trading stocks or commodities? Find out what are the differences in these two markets here: https://t.co/BnA07cMV0s https://t.co/fdigOgkmio
  • A forex trader is strategic, disciplined and always switched on to the markets. Learn how to build an FX mindset here: https://t.co/tB3aAErd70 https://t.co/Ilqz8BWTk0
  • The final ‘full’ week of the year brings about the last wave of significant event risk from around the globe, including three central bank rate decisions (Fed, BOE, & BOJ). Get your market update from @CVecchioFX here:https://t.co/PhqxSPlngI https://t.co/XX57vSjQwV
  • Greed is a natural human emotion that affects individuals to varying degrees. Unfortunately, when viewed in the context of trading, greed has proven to be a hindrance more often than it has assisted traders. Learn how to control greed in trading here: https://t.co/kODPAfJE79 https://t.co/HOvzuOICQx
  • Ever wonder if there are other chart types that can be sued for technical analysis? HLOC charts are discussed in the following article as well as their pros and cons. Learn more here: https://t.co/qV3c7a4YR3 https://t.co/32hYzqhuZ9
  • The Australian Dollar sits on the crossroads of Treasury yields, the S&P 500 and US fiscal stimulus expectations. Will $AUDUSD gains slow? Chinese Q4 GDP and Australian jobs data are due. Get your market update from @ddubrovskyFX here: https://t.co/BsYmmWFYOH https://t.co/HhLqb2iVgk
  • #Gold prices have come under significant pressure to kick-off 2021. However, the formation of bullish technical patterns across multiple timeframes suggests that a rebound higher may be at hand. Get your market update from @DanielGMoss here: https://t.co/Dpf8N4Fh0T https://t.co/pnZpnM9yT5
  • The ISM manufacturing index plays an important role in forex trading, with ISM data influencing currency prices globally. Learn about the importance of the ISM manufacturing index here: https://t.co/Xr3xtoFpZy https://t.co/yCtLFemdNc
  • GBP underpinned as BoE downplays negative rates, alongside vaccine rollout. Get your market update from @JMcQueenFX here: https://t.co/n6V6uw0XV5 https://t.co/Toq2fxSdBE
FOMC: With Today's Hike Priced-In, This Meeting is About the Balance Sheet

FOMC: With Today's Hike Priced-In, This Meeting is About the Balance Sheet

2017-06-14 13:30:00
James Stanley, Strategist

Talking Points:

- Today brings an interest rate decision from the Federal Reserve and a hike is widely-expected.

- The Fed has remained persistently-hawkish throughout 2017, yet the U.S. Dollar and Treasury Yields have been moving-lower with a hastening in the move around March. What changed?

- If you’re looking for trading ideas, check out our Trading Guides. They’re free and updated for Q1, 2017. If you’re looking for ideas more short-term in nature, please check out our IG Client Sentiment.

To receive James Stanley’s Analysis directly via email, please sign up here.

Today at 2PM, the Federal Reserve will conclude their two-day meeting with the announcement of their interest rate decision. It’s widely expected that we’ll see the Fed adjust rates higher today, moving to a target of 1-1.25%; and this has been so expected for so long that we’ll probably see more drama if the bank doesn’t hike. But perhaps more pressing than today’s widely-expected interest rate hike is what the Fed says about their plans for the balance sheet and how many more rate hikes the bank might be looking at before the end of the year.

Coming into 2017, the ‘reflation trade’ was driving through global markets with bond yields moving higher in tandem with stock prices, even as expectations were building for even higher rates; which was, in turn, driving the U.S. Dollar-higher. The prevailing thought after the Presidential Election was that oncoming fiscal stimulus and tax cuts could offset the tighter borrowing conditions posed by a continuation of rate hikes that was afforded by this friendlier operating environment.

But as we turned the page into 2017, matters began to change…

The U.S. Dollar set a fresh 14-year high just two weeks after the Fed’s December rate hike, and has so far spent all of 2017 channeling-lower. The Greenback posed a quick run of strength from early-February leading into the Fed’s March rate decision: But after the bank hiked rates in March, the U.S. Dollar put in another bearish reversal, and has since continued to move-lower.

FOMC: With Today's Hike Priced-In, This Meeting is About the Balance Sheet

Chart prepared by James Stanley

This reversal isn’t relegated solely to currencies: We’ve seen this take place in bonds, as well. On the chart below, we’re looking at the reversal in the 10-year, which hastened around the March rate decision. We’ve also identified the ‘taper tantrum’ of 2013, as this will be relevant later in the article.

FOMC: With Today's Hike Priced-In, This Meeting is About the Balance Sheet

Chart prepared by James Stanley

What makes the two above reversals interesting is the fact that the Fed’s stance has been rather consistent throughout this period. The Fed has been persistently hawkish and looking to normalize policy: This has not changed. The only matter that has changed is the apparent opinion of the Fed’s take on the balance sheet, and this theme began to gain prominence around the Fed’s rate hike in March of this year.

The Balance Sheet

This is somewhat of the elephant in the room for the Fed right now because nobody knows really how this will work. There are no historical models from which we can build models nor are there any relevant examples from which we can draw inferences. The Fed traditionally carried smaller sums with operations generally relegated to short-dated securities: But when the Financial Collapse hit, and when interest rates were pegged to the theoretical floor – the Fed needed to find another way to drive liquidity into markets, and buying bonds was a novel way of doing so. Buying bonds, and flushing cash into the financial system was one way that the Fed could continue to push low rates by keeping demand (prices) for bonds high.

The Federal Reserve accumulated $4.5 Trillion worth of bonds after multiple rounds of QE, and at least at this point, have been carrying that portfolio while also starting to ‘normalize’ rate policy. There have been a litany of questions ever since the Fed started buying bonds about what the bank might do when the time came to normalize policy. QE, in essence, flushed capital markets with fresh cash; but what might happen when that cash is removed from the marketplace? While an academic vantage point might proffer that this could lead to higher rates, what we saw in 2013 is that markets aren’t inclined to wait around for higher rates before they look to sell-out of bonds. The simple signaling that higher rates are on the horizon could be enough to create panic.

This concern was so pronounced that in 2013, as the Fed was nearing the end of their QE-cycle, investors started to anticipate tighter policy conditions before the Fed even discussed the prospect of higher rates. Fearing that the Fed would begin hiking and tightening policy as soon as QE concluded caused investors to sell-out of bonds in anticipation of higher yields and lower prices. This has what has come to be known as the ‘taper tantrum’, and this very much is on the minds of Central Bankers around-the-world as banks look to move-away from massive stimulus outlays.

This fear was allayed as the Fed gave multiple assurances that rate hikes were not necessarily right around-the-corner. A year and a half later, the Fed was finally ready for that first rate hike, and in December of 2015, that’s what happened. But just weeks after that rate hike brought a fresh round of risk aversion, and we had to wait another year for the second hike in December of 2016. With the backdrop of the ‘reflation’ trade keeping markets ebullient, the Fed had felt confident enough to begin discussing what their plans are around the balance sheet, and this is the apparent factor of change.

The meeting minutes from the Fed’s March rate decision first mentioned the prospect of gradual balance sheet reduction. The initial time frame mentioned was ‘later this year’, but since that first mention, we’ve started to hear the Fed get more vociferous on the topic, and this is what appears to be driving U.S. yields and the U.S. Dollar-lower. The meeting minutes from the Fed’s May rate decision further discussed the concept of balance sheet reduction, and in June, we heard the Fed’s Jerome Powell roll out broad strokes of a plan that would have the bank beginning to look at balance sheet reductions ‘later this year’.

From Mr. Powell’s plan, it would appear that the Fed is going to begin to look at selling bonds after rates have been ‘normalized’, and this definition of ‘normalized’ appears to include one more hike in 2017 after today’s expected move. But perhaps more worrying is the fact that the Fed is going to look to tighten the money supply with constant open market operations rather than by going the traditional route of raising interest rates.

Higher rates are what generally drives capital flows into a currency and an economy; but if the Fed is tightening the money supply by selling bonds and extracting cash rather than by increasing rates – there is a very valid case for continued U.S. Dollar weakness, even as the Fed looks to normalize policy.

USD Strategy

Yesterday, we looked at a two-part setup designed to work with USD volatility around today’s interest rate decision. For those looking at USD-weakness scenarios, a long EUR/USD setup could be attractive. If, however, the Fed is able to inspire some element of strength in the Greenback today, long USD/JPY could be an attractive venue as interest rate dynamics reinvigorate the bullish trend in the pair.

FOMC: With Today's Hike Priced-In, This Meeting is About the Balance Sheet

Chart prepared by James Stanley

--- Written by James Stanley, Strategist for DailyFX.com

To receive James Stanley’s analysis directly via email, please SIGN UP HERE

Contact and follow James on Twitter: @JStanleyFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

DISCLOSURES