Written By: Adrian Moore – Forex Focus
Near-term outlook for the US dollar versus the majors following the FOMC meeting.
The Federal Open Market Committee (FOMC) in its penultimate monetary policy meeting of the year voted unanimously to leave the benchmark federal funds rate untouched at 1.00-1.25 percent and focus instead on normalizing the $4.5 trillion balance sheet. The US central bank last tampered with the interest rates in June of this year, when it raised the federal funds rate from 1.00 to 1.25 percent.
The outcome of the two-day monetary policy meeting, which concluded on November 1, 2017, was in line with Wall Street expectations and resulted in a muted reaction from US equity markets and the greenback as they settled with small gains compared to the previous session. The Fed last raised the federal funds rate in June of this year.
Following is the Federal Reserve’s press release that followed the monetary-policy decision:
“Information received since the Federal Open Market Committee met in September indicates that the labor market has continued to strengthen and that economic activity has been rising at a solid rate despite hurricane-related disruptions. Although the hurricanes caused a drop in payroll employment in September, the unemployment rate declined further. Household spending has been expanding at a moderate rate, and growth in business fixed investment has picked up in recent quarters. Gasoline prices rose in the aftermath of the hurricanes, boosting overall inflation in September; however, inflation for items other than food and energy remained soft. On a 12-month basis, both inflation measures have declined this year and are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.
“Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Hurricane-related disruptions and rebuilding will continue to affect economic activity, employment, and inflation in the near term, but past experience suggests that the storms are unlikely to materially alter the course of the national economy over the medium term. Consequently, the Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further. Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.
“In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1 to 1-1/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation. In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”
In the absence of the press conference that generally follows most of the central bank’s monetary-policy committee meetings, brokerages and banks were pretty certain that the Fed would maintain a neutral stance in the run-up to the FOMC meeting. However, market experts are anticipating a rate increase in December of this year, with the odds currently stacked at 70-75 percent in favour.
Coming to the US equity markets following the monetary-policy decision, the Dow settled modestly higher at 23435, up about a quarter percent from the previous session’s close. The tech-heavy NASDAQ ended the day unchanged at 6248, while the S&P 500 closed at 2579, advancing about 0.15 percent after pulling back from all-time highs set earlier in the session. The long-term trend in equity markets continues to remain bullish, and with third-quarter corporate earnings in full swing, better than expected corporate profits are lending support to the broader indices.
The greenback continued to extend its gains versus the euro, rising around 0.25 percent on November 1 to settle at 1.1620. The US dollar, which played second fiddle to Europe’s single currency for most of this year, could extend its recent gains, with the pair likely to test supports at 1.1500 in the near-term. Resistances are placed at 1.1770-1.1800 and offer good short and reverse (SAR) opportunities for short-term traders.
The USDGBP settled at 1.3244 on November 1, down by 0.28 percent for the session. The pair extended its losses further on the following day by about 1.5 percent to close at 1.3057, holding near key supports at 1.3050 after breaching them briefly. A close below these levels could trigger pound-sterling shorts, and the pair could test 1.2650-1.2700, last seen in June of this year. Although the near-term trend remains bullish in favour of the UK currency, the pair is likely to oscillate in the 1.3050-1.3300 range for the rest of the year.
The Japanese yen, on the other hand, has been oscillating between 108.00-114.00 versus the dollar for most of the year. The pair settled at 114.15 on November 1, with the dollar gaining for the second straight session. Key near-term resistances are placed at 114.50-114.75, a close above which the pair could race to 119.00. Immediate supports are at 113.00, followed by the previous lows at 111.75-112.00. Look to short at the resistances with stop and reverse trades at 115.25.