Weekly Trading Notes – Will the FOMC hike rates this week?


  • Simply put, the Fed is critical this week. The market has once more built itself up into believing rightly or wrongly that this decision of the FOMC is going to shape markets for time to come. Essentially the actual decision is not really that important as the Fed has been guiding financial markets for this moment (whether it be on Thursday or in December) for months. However it is the pace of the rate rises that that will determine the impact on market sentiment over the longer term. Are Janet Yellen and the FOMC ready to finally take the plunge and raise interest rates?
  • yellen 2Volatility will be clearly elevated by this week’s decision, whichever way it goes. The balance of the argument is that the hawks see the Fed as almost having to start the normalisation process (and hope that the uptick in average hourly earnings feeds through to inflation further down the line), whilst the doves will point to the risks of moving too soon (before inflation is on a confirmed upward trajectory) and the impact of the recent market turmoil (concerns over China slowing down, the emerging markets under big pressure). The decision could easily go either way and it is because of this inability to position with any real certainty that markets will react with volatility.
  • For me though there will be more of a reaction on a hike (of 25 basis points) due to the shock of action. An intriguing third option comes with a mini-hike of say 10 basis points. This could be a decent compromise that could all the market the assurance that rate hikes would be slow and gradual. I do though see this as an unlikely third option.
  • Interestingly, the China industrial production has not made too much of an impact this week as the Fed is focused squarely on the Fed. A miss on key China data has recently been a trigger for significant risk aversion but this week it has passed by the wayside. Perhaps the better than expected China retail sales has helped settle nerves as this is a positive for a country that is looking to realign its economy far more towards the basis of the consumer.
  • There is though still key data to watch for this week which could make an impact, not least of all the US inflation data. Markets will be focusing on the core CPI reading and after the core Personal Consumption Expenditure fell a couple of weeks ago the If the data this week is anything to go by then a 14 month high to the expected +1.9% would be an interesting last tier one economic data release in the run up to the FOMC meeting.
  • Market sentiment seems to be moving ever more into cautious mode as the week progresses. Although there has been a decent reaction on equities today, there is still a lack of a decisive move in the first couple of days this week. The US dollar is fairly steady also, whilst US Treasury yields have actually picked up a touch again (especially on the 2 year yield which is back to 0.75%). This all suggests that markets are in the balance moving into Thursday’s decision.
  • The oil price has dropped away on Brent Crude, back at a 3 week low, whilst WTI has not yet breached its equivalent support but the downside pressure appears to be greater. This is also the case with precious metals which are falling away again and looking set for further weakness. A stronger dollar would put them under pressure but again the volatility is likely to be significant across these instruments.
  • For the data releases, UK wage growth will be certainly watched. Wages are actually growing at decent lick in the UK (arguably ahead of the more lacklustre US earnings growth) and Wednesday’s employment data is expected to show further ex-bonus improvement to 2.9% which would be real wage growth of 2.9% (ie with nominal inflation flat). US housing data could also bring some intraday volatility with both the National Association of Home Buyers House Price Index expected to remain flat, whilst building permits are also a keenly watched indicator.
  • Watch for: US CPI inflation, FOMC monetary policy



EUR/USD – Increasing caution before the FOMC drives significant volatility       

  • It is difficult to focus on much else other than the Fed this week and for that reason markets are likely to become increasingly tight and cautious until 1900BST on Thursday. Subsequently there is likely to be a huge reaction depending upon whether the hawks have got their way or not. My gut feeling is still for no hike and this would induce a relief rally.
  • Trading above the medium term pivot $1.1050/$1.1100 is still a dovish sign for the dollar for me and a bullish outlook near to medium term on EUR/USD. A test of the old highs $1.1460 can be expected on a no change from the Fed, but volatility can drive big market moves.
  • Watch for: Eurozone final CPI, US CPI inflation, FOMC monetary policy

GBP/USD – Caution in front of the FOMC and then subsequent volatility

  • Stronger UK earnings growth would be positive for Cable and this would be compounded if the FOMC were to be dovish on Thursday. This could even begin to drive a repricing of the interest rate differentials and a sizeable rally.
  • The range play between $1.5170/$1.5930 continues and the recent rally off the lows is fairly neutral for the outlook. A dovish Fed could pull Cable back towards the highs near term.
  • Watch for: UK wage growth, US CPI inflation, FOMC monetary policy

USD/JPY – A break of the 118.30/121.70 range  

  • The market is gravitating around 120 as the consolidation continues to play out. The Fed will drive the next move and a dovish move suggests that 118.30 could come under pressure.
  • Technically the medium term outlook is increasingly neutral in the range 118.30/121.70, however this could all change after Thursday.
  • Watch for: US CPI inflation, FOMC monetary policy

Gold – Volatility could trump the deteriorating technical outlook

  • Precious metals remain out of favour and there are few positives to point towards as the Fed moves towards actively tightening momentary policy. The volatility near term could be driven by no change of policy but this would still be seen as a chance to sell as the outlook for gold remains under pressure longer term.
  • Technically gold is under pressure, lower highs and lower lows mean that any near term rally towards $1117 would be a good chance to sell. However the impact of volatility in the near term could well render technical resistance levels meaningless. However once the volatility settles down I would still expect further downside on gold.
  • Watch for: US CPI inflation, FOMC monetary policy

Indices – Markets are rangebound but would an FOMC hike be ultimately positive?  

  • S&P 500 – The market is increasingly rangebound and this will continue until Thursday. Conventionally a hike could induce a sell off and test of the 1903 reaction low, but once the dust settles surely a rate hike is ultimately a positive for equities as it conveys positivity in the economy which is normalising. Could a sell-off be a buying opportunity?
  • DAX Xetra – The DAX is rangebound 9928/10,513 but this is likely to come to an end with some direction this week, such is the wide-reaching influence of the Fed. A hike could induce a snap sell off, but this could be short lived and actually provide a chance to buy.
  • FTSE 100 – FTSE is still being impacted by the outlook on the commodity plays and with oil under pressure this is a drag, however improving base metals are positive for mining stocks. However the Fed will create the near term volatility which could provide another chance to buy. Near term support is at 6020, but the FTSE 100 is still a laggard to other major markets.



Wednesday 16th September

  • UK – Unemployment and Average Earnings
  • Eurozone – CPI (final)
  • US – CPI
  • US – NAHB Housing Market Index
  • US Crude Oil Inventories
  • New Zealand – GDP

Thursday 17th September

  • Switzerland – SNB Monetary Policy
  • UK – Retail Sales
  • US – Building Permits & Housing Starts
  • US – FOMC Monetary policy + Press Conference

Friday 18th September

  • Canada – CPI



Sunday 20th September

  • Eurozone – Greek parliamentary election

Monday 21st September

  • US – Existing Home Sales

Tuesday 22nd September

  • UK – Inflation report hearings in parliament
  • Eurozone – Consumer Confidence

Wednesday 23rd September

  • China – Flash Manufacturing PMI
  • Eurozone – Flash Manufacturing PMI
  • US – Flash Manufacturing PMI
  • US Crude oil inventories

Thursday 24th September

  • Japan – Flash Manufacturing PMI
  • Eurozone – German Ifo Business Climate
  • Eurozone – Targeted LTRO
  • US – Durable Goods Orders
  • US – Weekly Jobless Claims
  • US – New Home Sales

Friday 25th September

  • Japan – CPI
  • US – Q2  GDP (final)
  • US – University of Michigan Consumer Sentiment (final)


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