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The rationale behind the trade was premised more on the technical set-up than fundamental, with price action turning decidedly bearish.
Clearly the Fed have been far more dovish than we or the majority of market participants were expecting, in fact many would go as far as saying it was as dovish of a scenario as the Fed could have delivered. Consensus was that the Fed would cut by around $10 billion, but the failure to taper its bond buying program at all, mixed with downgrades to its growth projections and no change to its forward guidance with regards to the threshold for raising the Fed funds rate was significantly more dovish than market expectations.
It really seems that the Fed are concerned about the upcoming fiscal tightening and the issues around the debt ceiling in mid-October and thus are more than happy to keep monetary policy loose. One of the key points we took out of the statement was that the unemployment rate would need to fall ‘considerably’ below the 6.5% threshold before the Fed hikes rates. This is key, and market expectations of future hikes were dealt a massive blow, with the Fed funds future now pricing in 54 basis points of tightening by June 2015, down from 65 basis points expected yesterday.
Data is once again key for tapering expectations going forward and whether or not we see the Fed cut (taper) its bond buying program in its December meeting. We have had a longer-term bullish USD stance for some time and we feel this meeting does alter our outlook for the USD. On the back of this meeting, gold is likely to find buyers on dips, especially as the trend in US payrolls on a quarterly basis is falling.
We revert to the sidelines now and feel the Fed have effectively given the bulls a green light to buy risk assets, while gold will also do nicely and the USD is likely to find continued sellers.