Federal Reserve reaffirms commitment to raising interest rates

Global stocks have opened trading on Thursday pointing higher, following the US Federal Reserve performing in-line with expectations during last night’s FOMC Minutes release, and reaffirming its intention to begin raising interest rates in the coming months. This boosted global economic sentiment, with the US economy continuing to carry the torch in the race to global recovery, while economic progress outside of the United States remains in question. The underlying message from the Fed continues to be “more of the same please”, however there were some comments regarding fears over the possibility for international factors to pose a threat to US domestic progress.

Overall though, some will debate whether the release can be considered on the dovish or hawkish side, while I just consider it to be a neutral message of confirming the earlier policy of ‘more of the same progress required, please’. However, some could argue that the message that rates will not be raised before April to be slightly on the hawkish side, considering the previous signals from November was that rates will not be raised until the middle-to-latter end of 2015. Nonetheless, the hint that we could be looking at a potential April interest rate increase could provide some optimism over the global economy.

There was a small increase in demand for the USD following the release, with metals finding themselves under pressure. Gold slipped below $1208, with the yellow metal already stretching down to $1204 in the early hours of Thursday morning. Market participants who are bullish on the USD will now be eagerly awaiting the Fed meeting in April, in the hope that the central bank will gradually begin raising rates then. I see this as outside chance at this point, and it would be dependent on continued improved economic data. There had been some concerns economic momentum might be slowing, but after annualised GDP at 5%, this is hardly going to be surprising.

Attention will now turn to this Friday’s NFP where the preliminary employment report released yesterday suggests 241,000 jobs could have been added by the US economy last month. However, the accuracy of this preliminary employment report has come under question in recent months. Following a month when the US economy added an outstanding 320,000 jobs to its economy, a figure above-and-around 215,000 should still be seen as positive and reaffirm rate hike optimism.

The EURUSD has continued to record fresh nine-year lows, this time at 1.1791 with it only being a matter of time before it dropped below the 1.18 ladder. It has already been announced that German Factory Orders declined by a monthly 2.4% in November, which is just further weakening on a near-daily basis and could be argued to have hit its lowest point yesterday. This was because it was finally confirmed that the Eurozone’s greatest challenge yet (deflation) had arrived, when it was announced that inflation turned negative with prices falling 0.2% in December.

The data we are receiving from Europe is just continuing to reiterate, and widen the ever-weakening EU economic sentiment. The pressure on the European Central Bank (ECB) to introduce new tools from its stimulus toolbox was already at an intense level, with the pressure cooker now heating up even further. Many are now expecting QE to be released from the ECB. Does deflation all but confirm that it’s on the way? No. However, it certainly increases the speculation over how the ECB will react. Either way, the divergence between both economic sentiment and monetary policy between the ECB and the US Federal Reserve is widening rapidly, and traders are pricing in further EURUSD declines as a result. Overall, and with this divergence in mind, there is still far more scope for this pair to decline further.

Elsewhere, the GBPUSD had certainly not reached a floor with the pair recording a further 18-month low at 1.5034. As repeatedly mentioned, the GBP is just suffering from a real lack of attraction. Upcoming UK General Election momentum is picking up and weighing on investor sentiment, while other factors such as the BoE’s dovish view on inflation, and resistance towards raising UK interest rates is just weighing further on the GBP. Signs of domestic growth slowing have also certainly not helped, with Services (main UK GDP contributor), Manufacturing and Construction PMIs all showing that sector activity is growing at a reduced rate. Why has the GBPUSD reached a new low already this morning? Traders are arriving early to price in the BoE announcement later today that UK interest rates are remaining unchanged.

The oil markets are continuing to fall down the funnel, with the low for Brent now being found at $49.64 and Crude diving to $46.81. The economic conditions oil are facing are just refusing to change, and are unlikely to change anytime soon. Increased supply and reduced demand due to global economic fears will only result in one outcome, with this being further moves in a bearish direction.

Written by Jameel Ahmad, Chief Market Analyst at FXTM.

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