Less attention to possible risks all around

July 29, 2016

The US Federal Reserve voted to hold the key rates unchanged keeping it in the range of 0.25-0.50 percent. Hoping that it cuts the short-term risks of the economic outlook, leaving the door opened for policy tightening in current year.

The Central Bank of the US said that economy expanded at a moderate pace, while job growth was robust in June, which overshadowed the abrupt NFP slack in May. The FED also added that household spending appreciably increased pointing, which in turn pointed to the direction of increased labor productivity.

Although policymakers stated that they will remain on a “data dependent” mode, keeping track of inflation and external risks. Less attention will be paid to the possible shocks, which may cause the US economy to go astray.

“Short-term risks to the economic outlook have diminished,” – was said in a statement after the FED’s two-day meeting.

At the same time, the central bank noted that projections about inflation remain fairly unchanged.

After lifting the rates in December, the first time after nearly a decade the FED displayed certainty of two rate hikes that were to come in 2016. But the spirit of policymakers was oppressed by sudden UK decision to break with the European Union, bringing global uncertainty on a new level.

Despite the robust shifts in the number of jobs in June, which showed almost full employment. The majority of the FED voters advocated caution in raising rates, so there would not distractions with the goal of 2 percent inflation target.

Currently inflation in US averages 1.6 percent and trails below the target for more than four years.

The slowdown of the global economy, the volatility of the financial markets and the uncertainty of the impact what the UK decision to withdraw from the European Union could have, repeatedly forced the policymakers once again to postpone the rate hike.

The odds of a rate hike in the coming meetings hiked as the FED hinted that they will pay less heed to global risks. In last September the odds rose to 18.0, while futures for December price by only 39.7 percent of rate hike. There is still less than a 50 percent probability of the FED policy tightening within this year.

The US Dollar fell after the meeting along with precious metals and Yen, DXY dropped to 96.50 (-0.26%) from Wednesday peak of 97.39, Gold surged 1.15 percent to $1,349, Silver and Platinum added 2 percent both, USD/JPY fell by 0.66 percent to 104.69 despite the BoJ stimulus announcements happening tomorrow.

We want to remind our traders that the Bank of Japan will announce Policy Rate tomorrow and release a Monetary Policy Statement on Friday which will increase volatility on the JPY pairs. It is advised to take proper trading risks during this event and reduce positions with excessive risk exposure.

It became difficult for bulls to bet on crude oil as the surprising EIA update showed how crude oil inventories in the US have grown 1.7M barrels to 521.1M total reserves halting 9-week consecutive declines. Analysts expected a decrease by 2M barrels.  WTI fell by 0.12% to $41.88, while Brent declined 0.77% to 43.76. The US Oil production also rose by 303K barrels last week worsening the outlook for market rebalance.

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