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Dollar rally still alive post FOMC meeting!

Information received since the Federal Open Market Committee met in September suggests that economic activity is expanding at a moderate pace.

CFDs are a leveraged product and can result in losses that exceed deposits. Trading CFDs may not be suitable for everyone, so please ensure you fully understand the risks and take care to manage your exposure.
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When the Fed statement was released on Wednesday, it was very difficult to differentiate it from the September’s one. Traders’ first reaction was most likely “Is it a copy paste?”. In fact, it was not! The Fed only requires alerting one sentence to create the entire buzz seen markets yesterday, as it comes after weeks of mixed messages from Fed officials. If you were a fast reader, you would have probably picked up some differences.

Here is the full statement (Comparison between September and October):

Information received since the Federal Open Market Committee met in July  September suggests that economic activity is expanding at a moderate pace. Household spending and business fixed investment have been increasing moderately at solid rates in recent months, and the housing sector has improved further; however, net exports have been soft. The labor market continued to improve, The pace of job gains slowed with solid job gains and declining unemployment and the unemployment rate held steady. Nonetheless, labor market indicators, on balance, show that underutilization of labor resources has diminished since early this year. Inflation has continued to run below the Committee's longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation moved slightly lower; survey-based measures of longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term. Nonetheless, the Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring developments abroad. Inflation is anticipated to remain near its recent low level in the near term but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

The fed sees households spending and business fixed investment have been increasing at solid rates, although official figures do not reflect the strength seen by the fed.  We have to monitor consumer spending, retails sales and durable goods orders more closely within the next two months.

In dropping the statement “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.” the Fed removed a key barrier to tightening monetary policy and raise rates. This indicates that recent moves by PBOC and ECB are positive for the U.S. economy.

The dollar is little changed after a strong rally yesterday, and for the dollar to sustain strength we need a flow of positive data from the U.S. particularly jobs and spending.

Today’s GDP will be the first significant indicator after the Fed statement. Although it is a lagging indicator, a strong number is required to continue supporting the dollar’s uptrend. 

When the Fed statement was released on Wednesday, it was very difficult to differentiate it from the September’s one. Traders’ first reaction was most likely “Is it a copy paste?”. In fact, it was not! The Fed only requires alerting one sentence to create the entire buzz seen markets yesterday, as it comes after weeks of mixed messages from Fed officials. If you were a fast reader, you would have probably picked up some differences.

Here is the full statement (Comparison between September and October):

Information received since the Federal Open Market Committee met in July  September suggests that economic activity is expanding at a moderate pace. Household spending and business fixed investment have been increasing moderately at solid rates in recent months, and the housing sector has improved further; however, net exports have been soft. The labor market continued to improve, The pace of job gains slowed with solid job gains and declining unemployment and the unemployment rate held steady. Nonetheless, labor market indicators, on balance, show that underutilization of labor resources has diminished since early this year. Inflation has continued to run below the Committee's longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation moved slightly lower; survey-based measures of longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term. Nonetheless, the Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring developments abroad. Inflation is anticipated to remain near its recent low level in the near term but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range whether it will be appropriate to raise the target range at its next meeting, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.

The fed sees households spending and business fixed investment have been increasing at solid rates, although official figures do not reflect the strength seen by the fed.  We have to monitor consumer spending, retails sales and durable goods orders more closely within the next two months.

In dropping the statement “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.” the Fed removed a key barrier to tightening monetary policy and raise rates. This indicates that recent moves by PBOC and ECB are positive for the U.S. economy.

The dollar is little changed after a strong rally yesterday, and for the dollar to sustain strength we need a flow of positive data from the U.S. particularly jobs and spending.

Today’s GDP will be the first significant indicator after the Fed statement. Although it is a lagging indicator, a strong number is required to continue supporting the dollar’s uptrend. 

This information has been prepared by IG, a trading name of IG Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication.  Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. 

CFDs are a leveraged products. CFD trading may not be suitable for everyone and can result in losses that exceed your initial deposit, so please ensure that you fully understand the risks involved.