The perils of Fed guidance

September 22, 2015

The dollar has now more than recovered from the losses seen in the wake of last week’s Fed decision to keep rates on hold. This has less to do with the market changing its mind on the course of Fed policy (the fall in US 2 year yields has only been marginally reversed) and more to do with the wider re-assessment of risk and the global economy. Emerging market currencies, having staged a decent recovery since 9th September, changed course yesterday and were weaker (although not universally so). We’ve also had more talk from ECB officials in recent days hinting at the potential for more QE should conditions warrant.

The aftermath of the Fed decision has also seen a growing undercurrent of discontent on the part of investors, some suggesting that the uncertainty created by the seemingly ever changing guidance is actually worse that if the Fed had actually tightened policy by a modest amount. I wrote last year about the perils of continuing forward guidance (see Killing Forward Guidance) and even though the Fed formally dropped this earlier this year (removing reference to accommodative policy for a “considerable period”), their preference remains towards trying to guide markets on the outlook for policy, something which they’ve been doing now, rather unsuccessfully, for more than 2 years now. Recent comments from Bullard suggested that last week’s meeting was a close call and re-iterated that each meeting is live in terms of the potential for a change in policy. For today, the data calendar is again on the light side ahead of tomorrow’s preliminary PMI data for the Eurozone. EURGBP looks interesting after the downmove of the past two sessions, holding just above the 0.72 level, whilst AUDNZD is forming a decent base above the 1.12 level, despite yesterday’s turnaround in AUDUSD.

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