Last night we saw the Federal Reserve’s first opportunity to respond to a swathe of dovish leanings from global central banks in recent weeks. Janet Yellen and the FOMC did not blink, staying steadily on the path towards initiating its rate tightening cycle. Forward guidance is an important aspect of the Fed’s commitment to deliver monetary policy and to its credit, the committee is holding its nerve.
In the recent days there had been speculation that perhaps the Fed might waver in the midst of disinflationary pressures, falling oil prices and deteriorating global economic conditions. I thought that with the changing of the voting members on the committee towards a far more dovish bias of personalities, this could result in a dovish lean in monetary policy, but this has not proved to be the case. If anything, the removal of “considerable time” from the statement entirely (to leave “patient” as the new key phrase for timing of tightening; the replacement of “solid” wqith “strong” for the labor market conditions, and the replacement of “moderate” with “solid” when talking about economic activity, are all bullish shifts in language.
The strong dollar position built up over recent months had come under a bit of a wobble in recent days, but this FOMC statement suggests that the dollar strength now looks set to continue. Have these rallies against the dollar run their course? Perhaps…
Take GBP/USD for example. After a rally of 350 pips back up to the resistance around $1.5200, the pair is beginning to back away once more. A small top pattern has completed below $1.5150 neckline support and an implied correction towards $1.5080 may now be seen near term. A 4 day uptrend has been breached and the outlook is beginning to deteriorate once more. This continues to play well within my expectation of a test of the key July 2013 low at $1.4810 in due course.
Furthermore, with a bearish drift in the last 24 hours, the gold price has now dropped below key near term support at $1271.85. In my opinion, this support has been the factor that has been holding up an retreat back towards the key support of the old October high at $1255. The medium term rally on gold looks ready to retrace back towards the 38.2% Fibonacci level at $1254. I do not see this as a negative scenario for the bulls, in fact I see it as a healthy correction which will allow the bulls to renew their upside potential.
All that said though, the market still seems to be a little unsure so far and this return of dollar strength is very much still undecided. Interestingly, there has been a very muted reaction on the Euro/Dollar short term interest rate futures, whilst Treasury yields have barely reacted, with the 10 year yield picking up only slightly from its recent lows.
Perhaps this is a sign that the market is accepting of the path that the Fed is treading and the FOMC statement largely confirms what it already thought.