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Dollar Doesn’t Sink on Lower Fed Forecast but the S&P 500 Does

Dollar Doesn’t Sink on Lower Fed Forecast but the S&P 500 Does

John Kicklighter, Chief Strategist

Talking Points:

  • The FOMC lowered its forecasts for rate hikes going forward but the median still calls for 50bps of hikes in 2016
  • While a diminished forecast is dovish, the market's skepticism for hikes was far deeper going into the event
  • Brexit fears, global monetary policy and general volatility in the financial system now draw market's attention

See how retail traders are positioning in the majors using the SSI readings on DailyFX's sentiment page. Harness the power of big data to evaluate millions of historical price points to calculate the probabilities of short-term market moves using the GSI Indicator.

As expected, the Fed held its benchmark rate range unchanged at its June meeting; but that wasn't the metric that the market was judging the event against. The focus was on chances that the central bank was still pushing towards normalizing monetary policy moving forward - and most speculatively in 2016. According to the updated forecasts, the group says it is still on pace for hikes this year. And, that is significantly more hawkish than what the market is accounting for. The Dollar's immediate reaction to the event was mixed, but the event's impact will be far more significantly in the days and weeks moving forward as it shapes global monetary policy and risk trends.

On the topic of risk, the S&P 500's gains prior to the Fed decision evaporated after the update on policy forecasts. This builds on an growing concern on the aggregate effectiveness of monetary policy. Where more support has been added (with the ECB and BoJ for example), the market and economic response has been marginal or even contrary to expectations. That puts speculative appetite in a state of self-sustainability and renders central banks' efforts dangerously ineffective. That is a burden now as policy authorities try to propel growth; but it is a serious risk should a financial disruption hit in the future.

Moving forward, the focus turns to more volatile and skewed systemic concerns. Brexit remains an intense point of speculation and fear. Though the vote is still a week away, mere sways in sentiment have translated into incredible volatility for the Pound and UK assets. These reactions have in fact even spilled over geographic and asset-type borders. The BoE's views on Brexit will be ingested Thursday. Meanwhile, the collective dovish policy of the world's largest central banks will be weighed against the BoJ and SNB moves on tap. If the world were willing to do more to prop markets, would it matter? We look at the dominant themes and how it shapes our trading in today's Trading Video.

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