Sideways trading ahead of Fed rate decision

The FTSE has staggered out of the blocks this morning, in a quiet start ahead of the US rate decision. Trading is expected to be relative quiet in the lead up, with just the UK wage data providing a catalyst on route.

The FTSE has staggered out of the blocks this morning, in a quiet start ahead of the US rate decision. Trading is expected to be relative quiet in the lead up, with just the UK wage data providing a catalyst on route. 

  

UK wage data in focus 

After the higher inflation reading in the previous session, pound traders are now looking ahead to UK jobs data. Wage growth will be an important element of the report. In the three months to October wages are forecast to have increased 2.5%, which is a 0.3% increase from the three months to September, a step in the right direction to closing the inflation wage growth, or wage reduction in real terms. 

Should wage growth impress investors, the pound’s reaction could still be limited, as it was in the previous session with higher inflation. The reason for this is because, after raising rates last month, and given the Brexit uncertainty, the Bank of England are unlikely to look to raise rates again any time soon. The central bank believe that the inflation caused by a weaker pound post Brexit, will start to work itself out of the system come Q1 2018. 

US record breaking highs lack euphoria 

The US saw new record highs reached by both the S&P and the Dow Jones, whilst the Nasdaq closed marginally lower as semiconductor stock slid. Despite the Dow & S&P achieving the 4th consecutive record close, the markers were lacking the usually euphoria associated to such a statistic. The focus is firmly on the Fed’s rate decision today. 

Fed to hike by 25 basis points 

A 25-basis point hike is already priced in, given the Fed funds are showing over 98% probability of a hike. The focus for market participants will be on the statement, press conference and growth projections. Investors want a clearer understanding of where the fed sees the US economy headed in 2018 and what the future path of rate hikes will look like, given the Fed’s question of where is inflation? 

How does the FOMC see 2018? 

Investor will be watching the dot plot, which gives the suggested path of rate rises going forwards. In the last meeting the median member was expecting rates to be 2.75% over the longer term, noticeably lower than the 3% at the meeting before that. Should this fall again then dollar could have a rough time. 

Furthermore, if Yellen’s growth projections suggest a rise won’t come until Q2 next year, we could also see the dollar come under pressure. It is worth baring in mind, that this is Yellen’s last meeting so forward guidance could be lacking and instead a congratulatory tone could be struck. 

Market reaction? 

The dollar is expected to trade sidewise heading towards the release, with volumes on the markets expected to be towards the lower end, as investors choose not to take out positions in significant size before Yellen’s appearance. 

Confirmation of 2 maybe 3 rate rises next year, with the first hike projected in the first half of 2018, would be considered good news by the markets. In this scenario we could see the EUR/USD looking towards $1.16, whilst GBP/USD may find itself testing support at $1.3270 and $1.3230 on its way to $1.32. 

Anything less than this could see the dollar plunge lower, despite the fact that the Fed raised rates.

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.