Markets jumpy ahead of FOMC meeting

Although off its highs, the FTSE 100 has managed to shake off its midday slump, up around five points as the session draws to a close.

US Federal Reserve
Source: Bloomberg

FTSE struggles around 6760

As we get closer to the Federal Open Market Committee meeting, the market is becoming increasingly nervous, and the reactions to economic data correspondingly more severe. Today’s weaker housing data and stronger CPI gave a signal to move from equities for the day into the US dollar, prompting further weakness for equity markets.

In Germany another run to 10,000 for the DAX was stalled and most of the gains given back. Ahead of a big day for central banks tomorrow, the default position is prudence and hibernation, leaving the FTSE struggling around 6760.

Traders fret over US rate hikes

This morning US futures were content to move higher, even with Iraq and Ukraine in the background, on the basis that US interest rates will remain low for the rest of the year and well into 2015. A stronger CPI reading, which touched its highest level since 2012, has smashed that view, and traders are now fretting about US rate hikes. In the space of a week, the consensus opinion on rate hikes in the US and UK has been dismantled, reminding equity investors that low rates and bountiful liquidity is not going to be the default state in the future. Adjusting to that is a painful process, and markets still remain extremely jumpy, as witnessed by the choppy trading so far this afternoon.

CPI data hits Gold

Gold prices were hit after a stronger-than-expected CPI reading, briefly moving below $1260 and putting the first dent in the upward move seen so far in June. Price growth above 2% sends a worrying signal that the Federal Reserve might end up ‘behind the curve’ when it begins to tighten in earnest, with the danger it will then overreact in rate hikes. Ultimately, yesterday’s failure to hold above the 200-day moving average signals further losses for gold, especially if tomorrow’s Fed meeting sees a shift in tone towards a more hawkish outlook.

US dollar gathering momentum

US CPI figures have resulted in a move back towards the US dollar, and the betting has now shifted to an expectation that the Fed will be more alert to inflation when it meets tomorrow. Even if they plan to leave policy unchanged, the FOMC will need to reinforce the idea that they are monitoring price growth very closely, and this should provide a powerful upward momentum for the US dollar in the short term. 

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