The Fed minutes of the September 17 rate decision are due for release later today. The bank left interest rate unchanged, revised median interest rate forecast lower and also refrained from providing a hint at a possible rate hike in the near future.
Following the September 17 rate decision, the 2015 rate hike bets took a hit. This was followed by a horrible NFP number released last week, post which the 2015 rate hike bets were erased.
Heading into the minutes, here is how the picture looks like –
| Fed meeting | Rate hike probability (25 bps) | No rate hike probability (25 bps) |
| Oct 28, 2015 | 4.6% | 95.4% |
| Dec 16, 2015 | 36.3% | 62.1% |
| Jan 27, 2016 | 40.6% | 51.8% |
| Mar 16, 2016 | 43.6% | 37.7% |
It is clear that a 25 bps rate hike is seen happening in March 2015. However, the gap between a rate hike and no rate hike probability is narrow and can be quickly erased today itself.
Markets need clarity
The minutes are likely to carry the confusing language with regards to the timing of the interest rate hike. The data dependent stance and the call for “some further improvement in the labor market” and the language of ‘some, many’ is unlikely to impress the markets now.
Moreover, the markets need some clarity regarding the interest rate – whether Fed intends to hike rates or plans to keep them low for a prolonged period. Given the non‐committal stance of the Fed’s Yellen on September 17, it is unlikely that minutes could provide any clear idea of what Fed plans to do.
The confusing tone could very well spook markets and throw the March rate hike (25 bps) out of the window. A 5bps, 10ps, or 15 bps rate hike may happen, although, such rate hike would be equivalent of no change.
A further drop in the Fed rate hike due to the confusing tone of the FOMC minutes could lead to a fresh bout of risk aversion, sending risk assets – stocks, Sterling ‐ lower. The 10‐year yield treasury could drop below 2% and stay there, while traditional safe havens – Gold, JPY, CHF could strengthen.
A clear hint that rate hike won’t happen anytime soon could also erase March rate hike bets, however, clarity regarding what Fed intends to do is would keep markets happy.
EUR/USD – Levels to watch out
EUR has failed to sustain above the falling trend line (black line), but may another attempt at 1.13.
However, bulls need to wait for a daily close above trendline resistance (green line) located at 1.1323.
Till then, the downside remains exposed. Given, the early failure to sustain above the falling trendline resistance at 1.1265, the pair is likely to head towards 50‐DMA at 1.1190.
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