The FOMC shall meet on Wednesday for its penultimate rate decision of the year. No one in the markets expects the Fed to raise rates, although there are still a considerable few who believe the rates could be moved in December. The Fed would not publish a Dot chart or revise its GDP/inflation forecasts, not there would be a press conference, which makes it a dull event for the markets.

Nevertheless, there are a few points worth noting heading into the rate decision

  • USD a risk‐off currency – The moves in the FX markets witnessed since last week indicate the USD is making a comeback as a risk‐off currency. Till September, the US was viewed as a bright spot in the global economy and thus USD behaved like a risk currency. However, the picture has changed since then and the USD actually gained today, despite a batch of weak economic data. Moreover, falling rate hike bets make treasuries appear attractive, thereby increasing demand for the USD.

  • Central banks immediately retaliated to drop in Fed rate hike bets (ECB’s December hint, PBOC rate cut)

  • USD strength is indirect/forced tightening in the US. Thus, there is little/No room for Fed hawks

  • Oil is still heading lower

  • Corporate spending (durable goods) and household spending (retail sales) stays anaemic and is simply not responding even in anticipation of a rate hike in the future.

CME Fed watch – rate hike bets

Fed meetingRate hike probability
Oct 28, 20154.60%
Dec 16, 201530.50%
Jan 27, 201638.80%
Mar 16, 201653.00%

It is clear from the table above, the market expects the Fed to raise rates in March 2016. The probability is at coin flip levels.

Markets would be focused on wordings in the policy statement. The statement is likely to acknowledge the weak domestic consumption and the threat of rising US dollar. A surprise, if it has to come, shall be on the dovish side. In the light of new action from the ECB and the PBOC and the resulting forced tightening in the US (strong USD), the Fed may choose to introduce new dovish words in the statement.

A hawkish surprise is unlikely. The probability of the FOMC turning out to be a non‐event for the markets is high and that could keep USD bulls happy.

In case a dovish surprise comes through (which cannot be ruled out) the USD could take beating across the board. But the major beneficiary is likely to be Gold. In case of dovish surprise, GBP/USD could rally as well.

Moreover, Gold in non‐USD terms would remain an attractive option even if the FOMC turns out to be a non‐event

Gold weekly chart


  • To witness next leg upwards, the metal needs a weekly close above the 50‐WMA at 1180

  • A dovish surprise could ensure the metal closes above 1180 on Friday.

  • In case, the FOMC turns out to be a non‐event, the metal could remain in the range of 1180‐ 1160.

  • Gold/CHF (Gold in CHF terms) and Gold/EUR (Gold in EUR terms) appears attractive as well

GBP/USD – Bearish on Charts


Sterling has failed to take out the falling trend line resistance on the daily chart despite upbeat retail sales data last week. Strong UK service sector output and the weak batch of US data released today also failed to strengthen the GBP/USD pair. This clearly indicates Sterling is being viewed as the risk currency and more importantly, the USD is being viewed as risk‐off currency

  • The daily chart shows the cable remains stuck in the falling channel

  • Repeated rejection at falling channel resistance led to a sell‐off in the pair today

  • Sterling could drop below 1.5248 (50% of Apr‐June rally) in case of no show from the FOMC/hawkish FOMC and extend losses to 1.5087 (61.8% of Apr‐June rally).

  • On the other hand, a dovish FOMC could trigger a rally to channel resistance seen around 1.54.

However, further rally would need a daily close above 1.54 It remains to be seen how markets read ‘a no show or a slightly dovish statement from the Fed’. In case it is viewed as a negative sign, the USD still could rally after minor sell‐off, especially against risk assets since it is increasingly being treated as a risk‐off currency now.

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