Steve Ruffley's take on this week's FOMC decision
Wednesday’s FOMC decision is potentially the biggest data event of the last six years. So what are we likely to see and how are the markets likely to react? These are the questions all traders and analysts are looking to answer.
Most traders have heard of the nonfarm payrolls (NFP) and understand the impact of more or less jobs being created in the US labour market. It’s not very hard to interpret that more people in employment means less welfare claims and more consumer spending. For the markets this means strength for stocks and a general weakness in traditional safe havens like gold.
When it comes to the FOMC (the Federal Open Market Committee which decides US monetary policy) however, traders are less sure of what the data means and what the impact will be on the markets.
There is good reason! The data expected from the FOMC this week is a change in the US base interest rate. After years of ultra-low rates and ‘whatever it takes’ accommodative policy measures (QE) it seems Janet Yellen and the Fed feel the world’s largest economy can take a rate hike.
Unlike the NFP, which typically breaks down into ‘good news = buy, bad news = sell’, a change in rates is a much more complex matter for traders to interpret. In traditional economic cycles a rate hike is usually bad news, and we would expect to see a sell-off in stocks and a short-term move to ‘safe haven’ currencies and gold. This time around however it is unclear as to how the markets will perceive this potential hike.
I have two ways that I look at this:
1. My cynical side. We have had low rates for six years. In anticipation the US dollar has remained fiercely strong. You would expect ‘confirmation’ and a hike to push the dollar even higher. Knowing the markets as I do, this is a prime example of everyone in the market expecting the same thing, so what happens? The opposite. This could be a prime time for large institutions and hedge funds that are long of the dollar to cash in or hammer the dollar down in the short term to add to their existing positions.
2. My less cynical side. This is actually good news. If the largest economy on Earth can stand on its own two feet and withstand a hike, we should see less of a reaction than many traders fear. We should see gold head back down (a perfect time to make a charge for the $1000 level I have predicted), while stocks should take an initial hit, but carry on the dip-buying trend we’ve seen over recent years. The dollar should end the session higher.
All in all the fact that rates may go up has huge implications for the global forex markets and therefore for commodities and stocks alike. The fallout of a hike will move every market that you can trade: it’s your job as a trader to figure out which market will give you that all-important trading edge, while ensuring that you protect yourself against the risk of adverse movements.
Chief Market Strategist
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