Fireworks from the Fed while the SNB leaves questions unanswered

How’s that for irony? Prior to Wednesday’s FOMC decision, there was a complete over-fascination regarding whether the word “patient” would be removed from the committee’s statement. Although the highly speculated move occurred, patience remained as the dominant theme throughout the evening. It was once again stated that the Federal Reserve will be in no hurry or become pressured into raising interest rates, and this inspired a substantial round of USD profit-taking. The markets completely overpriced what the removal of the word “patience” actually meant in relation to when the Federal Reserve will begin the next stage in normalizing monetary policy. It should be clearly remembered that the Fed were never in any hurry to begin tapering QE, and I expect to see it demonstrate similar caution when it comes to raising US interest rates. It has been reiterated for over half a year now that the Federal Reserve will not be in any hurry to begin raising US interest rates, and a repeat of this message yesterday evening has basically erased any expectations for a rate hike until September.

Basically, the US Federal Reserve seized its opportunity to put an abrupt halt on the USD momentum because it was getting to the stage where if the USD bulls charged any further, it would have become very difficult to pinpoint a limit to USD strength. Looking forward though, the USD bulls have also just been presented with another opportunity to purchase the USD in dips. There is still going to be investor attraction towards the USD because the complete divergence in both economic and monetary sentiment between the United States and everywhere else has become obvious to traders. The USD uptrend will also remain supported as the Fed will still have to raise interest rates before the overwhelming majority of other central banks can even contemplate the idea, which largely explains why the USD has already recovered most of its losses suffered from yesterday evening.

Aside from stock bulls, the ones who benefited the most and probably applauded the tone delivered from the Fed yesterday are the central bankers of emerging market currencies. Reason being is that these currencies were beginning to deteriorate so rapidly, that concerns must have been emerging regarding a potential sudden outflow of capital. In regards to where the tone of the Federal Reserve leaves the Eurodollar, the outlook remains extremely bearish and I am expecting an imminent return to 1.05. The ECB launching QE signifies a new era of currency weakness for a central bank that is no stranger to loosening monetary policy, while there is no other divergence in economic and monetary sentiment that stands out further than the one between the US and Europe. The expectations for parity remain unchanged, and I am looking at the complete lack of progress over Greece as to what might weigh the bearish sentiment in that direction.

Gold is also going to struggle to progress and will likely only mount its own charge up the charts if the FOMC refrain from raising interest rates this year. I highly discard this as a possibility, and therefore anticipate that the longer-term bearish expectations for metals will remain underpinned. Likewise, the GBPUSD is still at high risks to sudden declines and I am not ruling out the possibility of this pair tumbling down to 1.42/1.43 within the next month. The complete lack of investor attraction to the currency continues to bite the pound, with concerns stretching further than inflation risks and the BoE’s laissez-faire attitude towards UK interest rates. The UK election is approaching fast, and you just have to look at Sterling volatility being at its highest level since the Scottish Referendum to see that traders are nervous about the next two months. The latest opinion poll suggests that the election is going to be extremely close, meaning that volatility can edge further and downside risks on the GBP remain strong.

The Swiss National Bank (SNB) decision has disappointed some and this is not limited to interest rates remaining unchanged, but because there was a lack of clarity concerning FX intervention. Despite the SNB cutting its growth forecasts, the CHF has risen against its trading partners because there is a high level of curiosity about whether a new minimum exchange rate against the Euro has been introduced. There is no doubting that the correlation has re-emerged within the past month where if the Euro weakens, the CHF weakens with it. Overall though, the CHF appears set to continue weakening in the longer-term because growth forecasts are being lowered, and pretty much everyone is expecting economic data for at least the first half of the year to be negatively impacted by the decision of the 15th January.