Trading Notes: In preparation for the FOMC rates decision


  • The markets are in preparation for the FOMC rates decision which is now upon us and surely the Fed will not disappoint markets again. Surely the Fed will hike rates this time around. The move will have a huge impact on markets which have already been driven significantly at the anticipation of the move. Volatility will be high if nothing else then due to the historical importance of a first rate hike in almost a decade. However quite how the markets react will depend upon a number of factors. Moving into the decision, markets appear to be priced for a “dovish hike”, which I believe will not be too far off the outcome.

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  • Expectation is that the Fed will hike rates by 25bps but the main issue is how fast. There are many arguments (that I will discuss in more detail in tomorrow’s preview) that should result in a rather volatile outcome for the markets whatever the FOMC decides. My feeling is that the Fed remains dovish in its stance but now feels that it has got to raise. With global financial markets under pressure again, it is now pretty much a case of “if not now, then when?”. I think therefore the Fed will be cautious in its outlook and projections (see the dot-plot and the statement). There have been expectations of there being a rate hike at every press conference meeting in 2016 (ie. one per quarter). I feel that this is a bit steep, especially considering how dovish the FOMC members have historically been and the lack of certainty over the impact the decision will have on the US. I am therefore well on the side of a dovish hike, with something between “one and done” and up to two hikes (to around 1%) by the end of 2016. The Fed seemingly had the room to be more aggressive following the underwhelming easing issued by the ECB, but the PBoC moving to peg to a basket (rather than the dollar) risks importing deflation to the US, so these two factors are balancing forces.


  • With this in mind, in forex markets I do not anticipate too much dollar strengthening on tomorrow’s FOMC and into 2016. I am not expecting parity versus euro in the coming months and I also believe that the lows at $1.0456/$1.0538 may also now have been seen. The inflation picture in the UK is similar to the US and is little real driver of Cable, and this should not be impacted by UK earnings growth. The reaction on Sterling could be fairly neutral as the Bank of England is on a similar path to the Fed. The market reassurance of a Fed hike could give Dollar/Yen some support.
  • Equity markets have been supported by the improvement in the oil price. The longer this rebound in oil goes on, the more confident equity investors will be. However longer term, the big unknown is how markets will react to the Fed tightening. There could be a relief rally on indices initially, but the impact on corporate revenues/earnings will be a key factor.  The VIX is well off its lows and aside from some intraday chop, the market seems to be much more fearful (demand for index shorts are elevated) reflecting the concerns still.
  • Commodity markets have been under huge pressure amidst the market expectation of a US rate hike. However could there be signs of recovery in oil finally? Very early days but finally a rebound has been seen after several weeks of losses. Exactly how sustainable this move is remains to be seen, as the oil market fundamentals remain very bearish with demand low and supplies continuing to climb. Metals remain under pressure with copper down again today, but this all plays into the China slowdown.
  • This week, the data front is focused squarely on one thing, the FOMC decision. Could the UK earnings growth data on Wednesday give a steer for the Bank of England’s own interest rate decision? Inflation pressures remain weak in the UK, but earnings holding up have been the one main factor to pull inflation higher. If this dips then sterling could be under pressure. The Bank of Japan monetary policy is unlikely to show any move on its asset purchases after the GDP upward revision
  • Watch for: FOMC monetary policy



EUR/USD – The pivot at $1.1050 is a key near to medium term barometer      

  • It all depends upon how dovish the Fed is going to be in its hike. If Yellen strikes a very cautious tone then the dollar could continue to weaken.
  • The old medium/longer term pivot band $1.1050/$1.1100 is a key technical barrier to upside, and a breakout would need a significant dovish surprise from the Fed. The technical are still with a bullish bias on the pair moving into the Fed.
  • Watch for: FOMC monetary policy

GBP/USD – Rallies still a chance to sell ahead of the Fed

  • UK earnings growth will provide some early volatility but the Fed is still the main event. A dovish steer could drive further rebound in Cable, however with the Bank of England in a similar boat to the Fed, just a number of months behind, I do not expect Cable gains would last.
  • The big 4 month downtrend remains intact and suggests selling into strength. Momentum indicators also back this view on a medium term basis. Ket resistance is $1.5335 with support now below $1.5000 in at $1.4893.
  • Watch for: UK earnings growth FOMC monetary policy

USD/JPY – The resistance at 122.20 is increasingly key  

  • The settling of the pair at a 6 week low would suggest the market is preparing for a dovish hike. The Fed is a far more interesting meeting than the BoJ on Friday which is unlikely to rock the boat too much
  • The overhead resistance at 122.20 is now the key. Indicators have become near term corrective but on a medium to longer term basis the market is still ranging. The major support is 118/119.
  • Watch for: FOMC monetary policy, BoJ monetary policy

Gold – Continue to use rallies as a chance to sell

  • Gold has failed to rally despite safe haven flows amidst the market fear in the past few days. I am not anticipating too much dollar strength on the back of the Fed however I see gold struggling once the dust on the FOMC meeting begins to settle.
  • The overhead supply in the band $1077/$1098 should be ready to provide plenty of sellers to fuel the downside one more and this will help to prevent any recovery gaining traction. Momentum indicators are still bearish and point towards using the rallies as a chance to sell.
  • Watch for: FOMC monetary policy, continued negative correlation to US dollar

Oil – Continue to use rallies as a chance to sell

  • Continued high supplies in the wake of the chaotic OPEC meeting which scrapped the  production limit should ensure the downward pressure remains on oil.
  • The near term technical rally on WTI is approaching the $38/$39 resistance band, which is still likely to be seen as a chance to sell
  • Watch for: Oil inventories, China news

Indices – The prospect of a late “Santa Claus rally” is still dependent on an oil price rally.  

  • S&P 500 – The oil price rebound has driven an S&P 500 rebound, so the near term market outlook is still very much driven by oil. Technically the big bull hammer candle needs to be backed up by another positive reaction and a move back above resistance at 2040 otherwise the rebound could quickly run out of steam
  • DAX Xetra – As the elastic band becomes extended to the downside there is the possibility of a snap back rally. Can it last though? The resistance comes in at 10,600 and needs to be breached for the bulls to feel more confident
  • FTSE 100 – With its 21% weighting in commodity plays the FTSE 100 is still flying around with the prices of oil and metals. Technically the FTSE 100 remains the worst of the major markets and the sharp selling pressure came close to the 5768 August low. The bulls will be hoping that the technical rally is built on more solid foundations (I remain unconvinced). The big overhead resistance comes in at 6080.



Tuesday 15th December

  • US – CPI
  • US – Empire State Manufacturing

Wednesday 16th December

  • Eurozone – Flash Manufacturing PMI
  • UK – Unemployment/Average Weekly Earnings
  • US – Building Permits/Housing Starts
  • US – Industrial Production/Capacity Utilization
  • US Crude Oil Inventories
  • US – FOMC monetary policy
  • New Zealand – GDP

Thursday 17th December

  • Eurozone – German Ifo Business Climate
  • UK – Retail  Sales
  • US – Philly Fed Manufacturing
  • US – Weekly Jobless Claims

Friday 18th December

  • Japan – BoJ monetary policy
  • Canada – CPI



Monday 21st December

  • Eurozone – Consumer Confidence

Tuesday 22nd December

  • US – GDP (Q3 final)

Wednesday 23rd December

  • UK – Current Account
  • US – Durable Goods Orders
  • US – Personal Consumption Expenditure
  • US – New Home Sales
  • US – University of Michigan Consumer Sentiment (revised)
  • US Crude Oil Inventories

Thursday 24th December

  • US – Weekly Jobless Claims
  • Japan – CPI