Fed mixed signals

January 28, 2016

The recovery in risk assets was rather snuffled out after last night’s FOMC meeting which was dovish, but a little less dovish than many had previously hoped for. The reaction from the markets was mixed and unsurprisingly volatile as both equities and the dollar fell, however the greenback has recouped its losses overnight. When you look through these mixed movements what we do know is that since December the economic data has been rather on the soft side, but despite this it’s still likely that a second hike will come in March before a pause. The problem with this is that they don’t want to make the same error that the ECB made back in 2011 under Trichet when they raised rates twice rather inexplicably in a move which was arguably a contributor to the current deflationary pressures, as well as lower commodity prices. The market is still pricing in less aggressive tightening than the Fed is suggesting and perhaps yesterday was a first sign that the Fed is moving towards the same thinking as investors.

Today the focus will be on sterling as we see the first release of last year’s Q4 GDP, expected to come in at 0.5%, up from 0.4%, but the year on year is due to decline from to 1.9% from 2.1%. Sentiment towards the UK economy has been waning throughout January and GBPUSD has been on a downward spiral since the middle of 2015, rather like the stock market. Later in the day there’s European consumer confidence and then US durable goods.

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