As we (along with everyone else who was paying attention) anticipated, the Federal Reserve did not make any changes to monetary policy in its October monetary policy meeting. Despite the lack of action, the Fed’s accompanying statement still managed to come off as hawkish, as the key comments below illustrate (emphasis mine):
- FED REMOVES LINE THAT GLOBAL DEVELOPMENTS MAY RESTRAIN GROWTH
- U.S. ECONOMY `HAS BEEN EXPANDING AT A MODERATE PACE'
- LABOR MARKET SLACK HAS DIMINISHED SINCE EARLY THIS YR
- ECONOMIC RISKS NEARLY BALANCED, MONITORING GLOBAL DEVELOPMENTS
- SURVEY-BASED MEASURES OF INFLATION OUTLOOK REMAINED STABLE
- SEES INFLATION RISING TOWARD 2% IN MEDIUM TERM
- PACE OF JOB GAINS `SLOWED,' UNEMPLOYMENT `HELD STEADY'
- HOUSING IMPROVED FURTHER, EXPORTS BEEN `SOFT'
On balance, today’s monetary policy statement keeps a potential rate hike on the table. This means that economic data over the next six months will be meticulously dissected through the lens of Fed policy, and that we could see a big move over the low-liquidity holiday period, regardless of what the Federal Reserve decides. With the pendulum of market sentiment still coming back from a dovish-Fed/bearish-dollar extreme, the greenback could remain supported at the expense of global equities, especially if US economic data improves.
Market Reaction
The market reaction to the Federal Reserve’s statement was logical, if a bit more extreme than many had expected. The US dollar immediately strengthened across the board, driving EUR/USD 120 pips lower to trade in the mid-1.0900s as of writing. Meanwhile, stock indices have been the big losers, with both the S&P 500 and Dow Jones Industrial Average (DJIA) dropping back to unchanged on the day. Yields on the benchmark 10-year treasury bond have also edged higher to 2.09%. As we noted above, these moves may run further as the excessive anti-dollar sentiment continues to unwind.
This research is for informational purposes and should not be construed as personal advice. Trading any financial market involves risk. Trading on leverage involves risk of losses greater than deposits.
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