Walking into the FOMC verdict

Forex News and Events

The FOMC verdict is the key highlight of the day. There are many speculations regarding the year’s last Fed meeting. The high probability scenario is the end of the “considerable time” rhetoric, in which case the Fed will still give itself enough flexibility regarding the timing of the first rate hike in 2015. Some even think that lower oil may entirely stop Fed from hiking its rate in 2015, which we believe is a quite low probability outcome at the current stage. In the opposite camp, some are convinced that the Fed might announce a clearer timeline for the rate normalization schedule. Indeed, the US economy added in average well above 200K nonfarm jobs on monthly basis through 2014, the unemployment fell to 5.8% and the “slack” in the labor market started narrowing visibly. However, there is no particular need to hurry given the moderate inflation dynamics and the ongoing slide in oil prices. The WTI crude cheapened more than 50% over the second half of 2014 and there is little chance the Fed missed the move. As a result, the headline CPI is expected to head down from 1.7% to 1.4% on year to November (due today), while the core PCE (monitored by the Fed) is seen steady at about 1.4% y/y on 3Q third read (due on Dec 23rd).

Today, we are curious to hear what the FOMC Chair Yellen has to say on the oil markets, the situation in Russia but also on global growth concerns, moderate EM growth, weakening commodity prices. Yet we do not believe that the problems of the rest of the world will fund a base for the US monetary policy outlook. All in all, the Fed decision will be important for the FX direction for the second half of the week. The US 10-year yields test 2 percent levels on persisting uncertainties.

Some color out of the UK

The BoE policymakers voted 7-2 to maintain the bank rate at the historical low of 0.50% showed the December 3-4th meeting minutes released in London today. The moderate pay growth remains a major concern in meeting the BoE’s 2% inflation goal despite stronger activity in UK economy. Concerns on subdued Euro area have been reiterated. The minutes said the slide in oil prices should be a “net stimulus to the economy by lowering costs for companies and boosting real incomes”. The average weekly earnings grew by 1.4% on 3-months to October (vs. 1.2% exp. & 1.0% last), whereas the unemployment rate deteriorated to 6.0% from 5.9% previously.

GBP/USD remains bid above its 21-dma (1.5691), BoE minutes and mixed jobs data couldn’t clarify direction. Eyes are now on the Fed. For a proper break into the short-term bullish consolidation zone, the Cable should clear 1.5800/1.5826 offers (optionality/Nov 27th high).

On the back of solid EUR negative sentiment, the ECB QE speculations and the first round of Greek elections today, EUR/GBP remains well offered pre-0.80215 (September-December descending topline & 200-dma). We continue seeing solid resistance pre-200-dma, which has not broken since October 2013.