Nervous markets ahead of the Federal Reserve


  • As we approach another potentially pivotal meeting for the Federal Reserve, markets are becoming increasingly nervous. A string of FOMC members calling for tighter rates have flown in the face of tepid economic data in recent days, but the confirmation that dovish voter, Lael Brainard continued to call for caution means that the FOMC goes into its blackout period (i.e. no more comments before the official meeting announcement) means that the market is solidly of the opinion that a September rate hike is highly unlikely. This is not without its relevance and markets will position accordingly.


  • Markets really sit up and take notice when central bankers shift their stance. That is why the markets really changed take last Friday on the comments of erstwhile dove Eric Rosengren (Boston Fed President and a voter in 2016) started talking about how leaving rates too low for too long could damage the economy. However a late scheduled speech by FOMC governor Lael Brainard could have been used as a platform for another dovish voter to change stance. However Brainard was stoic in her opinion that hiking too soon could damage any economic recovery. The committee is split but my takeaway from Jackson Hole and speeches by key FOMC figureheads such as Yellen and Fischer was that the FOMC was close but not there yet. The data since then has also been tepid at best. There will not be a Fed hike next week and the markets are certainly not pricing one in, with September Fed Funds futures suggesting between 15%/20% probability. This is nowhere near the Fed would want if it were to be hiking (the Fed does not like to do anything unexpectedly).
  • Equity markets have been very nervous in recent days with the prospect of what would have been a surprise rate hike that traders were not prepared for. However in the wake of Brainard’s comments, the sharp sell-off into the weekend has now been settled and the jangled nerves are beginning to calm down. Unless there is now some significant surprise in the data towards the end of the week (US Retail Sales and inflation) that paints a hawkish picture, the markets should now be fairly settled going into next week.
  • Already, forex markets are consolidating. The direction on EUR/USD could not be derived from the ECB, Rosengren or Brainard, and now it looks as though traders will be happy to sit it out and wait for the FOMC announcement next Wednesday. Sterling volatility will ramp up towards the end of the week as UK retail sales and monetary policy from the Bank of England will interest traders. The yen is likely to be fairly settled also in the coming week ahead of the Bank of Japan which is set to announce its reassessment of its monetary policy measures next Wednesday.
  • There has also been something of an interesting shift in bond yields in recent weeks. With the steepening of the Japanese JGBs curve, and in the Eurozone the sovereign yields jumping in the wake of the ECB monetary policy, could there be a change afoot? Draghi was firm in his insistence that governments take on some of the heavy lifting (no significant change there) but also the Governing Council did not even discuss extending the QE program beyond March 2017. This could be a head-fake by the ECB but central banks may finally be coming round to the view that ever flatter yield curves are playing their role in being a part of the problem and not the solution.

German Bun yield curve

  • Commodities will be driven by dollar moves predominantly. This is especially true of the precious metals which are increasingly neutral ahead of the Fed. Oil is a bit more idiosyncratic with the IEA noting that surpluses will be an issue into 2017 and this could pull the price lower, however the meeting of OPEC and Non-OPEC in Algeria on 26th to 28th September will also be a driver of volatility. I expect oil to continue to trade in a volatile uncertain manner for the coming weeks.
  • Economic data will focus on the UK and US this week. On Thursday the UK has both Retail Sales and the Bank of England. Retail Sales last month massively surprised to the upside as a weaker sterling helped numbers as Brexit appears to have initially been a positive for the high street. Will this be repeated again? The Bank of England seems to be remaining cautious on monetary policy but since the cut to 0.25% last month and extra QE, could there be a wait and see approach this month. There is the prospect of a further cut to 0.1% on rates in the coming months but the MPC is likely to hold fire for now. Then US Retail Sales and CPI inflation are the final tier one data points for the Fed in front of the FOMC meeting. Retail Sales are not expected to shoot the lights out with a month on month +0.2% whilst inflation numbers are still fairly stubborn, with headline CPI picking up to 1.0% whilst core CPI steady at +2.2%. None of this US data would implore the Fed to hike this month unexpectedly.
  • Watch for: US Retail Sales & CPI, UK Retail Sales and the Bank of England



EUR/USD – Breakout is below $1.1100 or above $1.1365

  • It is difficult to see what will move the euro this week in any material fashion ahead of the FOMC. US retail sales and CPI could drive a bit of intraday direction, however the outlook is fairly solidly set now for the next week.
  • Technically the outlook is increasingly neutral with converging long term trend lines. Momentum is neutral all the way now and whilst there may be some near term direction taken from a break of $1.1200 to the downside, or $1.1325 as resistance, the medium to longer term levels of $1.1100 and $1.1365 are far more important and will remain intact for the next week.
  • Watch for: US Retail Sales & CPI

GBP/USD – Range bound but with a drift back towards $103060/$1.3160

  • Sterling is increasingly range bound medium term (the miss on CPI today will keep any serious bulls at bay) whilst the improvement in UK economic data suggests that the UK is still yet to feel any real economic downturn in the wake of Brexit. Retail Sales will be a driver of initial volatility on Thursday but the main focus will be on the outlook of the Bank of England. Even that though is likely to be fairly muted.
  • The medium term range is broadly above $1.2800 and below $1.3500, whilst momentum indicators are also reflecting a ranging market. The near term drop cold continue back towards a pivot within the range at $1.3060 on any disappointment on UK Retail Sales or dovish BoE. US data will add to the volatility as well, but I expect the range to continue for now.
  • Watch for: US Retail Sales & CPI, UK Retail Sales and the Bank of England

USD/JPY – Expect to be range bound 101/103 in the run to the BoJ/FOMC

  • What will the BoJ announce in their reassessment of policy? Will the Fed hike? Will the BoJ sit on its hands ahead of the Fed? All this uncertainty is likely to mean that Dollar/Yen will settle down in the coming days.
  • The long term outlook remains negative within the long term downtrend channel. Nearer term technical are also more corrective with the prospect of a lower high now at 103.05 below 104.30. However the BoJ and FOMC policy announcements are likely to superseded any trending move and induce a consolidation between 101/103 in the coming week.
  • Watch for: US Retail Sales & CPI

Gold – Range bound and gravitating around $1330 in the coming week

  • The uncertainty of not only the Fed but also the BoJ will have a consolidating impact on gold in the coming week.
  • Technically the medium term outlook is range bound between $1300/$1375 but there is a nearer term pivot around $1330 which seems to be a pull on gold. I expect the market to remain in this range up to the key meetings next Wednesday.
  • Watch for: US Retail Sales & CPI

Oil – Volatile, choppy with no clear trend

  • Newsflow and fundamentals are key to moves on the oil price now. Chatter over potential for a production freeze at the Algeria meeting at the end of the month; the weekly EIA oil inventories and key moves on the dollar are driving volatility on oil. However the price could begin to calm down as the Fed approaches, but expect the volatility to ramp up once more towards the end of the month.
  • There is no real technical trend with high volatility big retracements on a daily basis and little real trend. For WTI, support at $43.00 and resistance at $47.75 will be seen as near term key for direction.
  • Watch for: EIA oil inventories to drive volatility, comments on a production freeze, US Retail Sales & CPI

Indices – Can equity markets hold off the profit-takers?    

  • S&P 500 – Huge swings in the last couple of sessions show the nerves that traders face ahead of the FOMC. The comments from Brainard could see the market calming down, but this does not get away from the fact that the bears are ready to move in again and a correction is clearly due.
  • DAX Xetra – The gap lower from 10,540 remains unfilled but the change in outlook could still usher some corrective move with momentum indicators dropping away.
  • FTSE 100 – FTSE 100 has been at the mercy of support for sterling in recent weeks (there is a negative correlation between sterling and FTSE) and this is likely to hold back any significant gains near term. The support at 6612 is extremely important as a breach would open a much deeper correction.

Economc Calendar


Wednesday 14th September

  • UK – Unemployment and Average Weekly Earnings
  • US – Crude Oil Inventories
  • New Zealand – GDP

Thursday 15th September

  • Australia – Unemployment
  • Switzerland – SNB monetary policy
  • UK – Retail Sales
  • UK – Bank of England monetary policy
  • US – Philly Fed Manufacturing
  • US – Weekly Jobless Claims
  • US – Industrial Production / Capacity Utilization

Friday 16th September

  • US – CPI
  • US – Michigan Sentiment



Monday 19th September

  • US – NAHB Housing Market Index

Tuesday 20th September

  • US – Building Permits & Housing Starts

Wednesday 21st September

  • Australia – Mid-year Economic and Fiscal Outlook
  • Japan – Bank of Japan monetary policy
  • US – Crude Oil Inventories
  • US – FOMC monetary policy & press conference
  • New Zealand – RBNZ monetary policy

Thursday 22nd September

  • US – Weekly Jobless Claims
  • US – Existing Home Sales

Friday 23rd September

  • Japan – Manufacturing flash PMI
  • Eurozone – Manufacturing flash PMI
  • Canada – CPI
  • US – Manufacturing flash PMI
  • US – Michigan Sentiment (revised)


Leave a Reply

Your email address will not be published. Required fields are marked *