A FOMC meeting for the ages? A FOMC meeting for the ages? A FOMC meeting for the ages?

A FOMC meeting for the ages?

Forex 5 minutes to read
John Hardy

Head of FX Strategy

Summary:  Fed Chair Jay Powell in the hot seat this week as this week’s Federal Open Market Committee meeting arrives with almost unprecedented pressure on the Fed to “send the right message” and signal a path to an aggressive easing cycle. Is the Fed there yet?


What will the Fed deliver this week and whatever the Fed delivers, will it be enough for the market to decide that the central bank is getting ahead of the curve or remains behind the curve and far from catching up. The still strong USD despite the pricing in of significant easing at coming meetings and a still flat rate curve suggest that the Fed is behind the curve and that the bar is high for a dovish surprise – on the order of a fifty basis point move this week that no one is expecting – much like the Greenspan move we discuss below. 

We’ll run through some scenarios on what the Fed may do Wednesday and how the market might react – but for now, suffice it say that this week’s FOMC meeting is one of the most anticipated in recent memory and almost can’t avoid sparking significant volatility, possible in either direction, or both directions, for that matter (i.e., a  kneejerk reaction that is quickly faded). Traders should recognise this and reduce leverage accordingly and consider ways to trade outcomes via long volatility trades or have protective hedges in place.

For now, a couple of past examples of how past Fed “first rate cuts for the cycle” played out are worth considering for perspective on how this can play out:

September 18, 2007: The market was increasingly uneasy about the US housing market and had already suffered an ugly >10% correction over the summer. The market was clearly expecting the first cut for the cycle heading into the scheduled FOMC meeting in September, but only a minority were looking for a 50 basis point cut, and Fed Chairman Bernanke over-delivered. The equity market was duly impressed and managed to rally for around a month and even posted an all-time high before rolling over into the most vicious bear market since the Great Depression. The Fed was extremely behind the curve.

January 3, 2001: US short rates were collapsing as the market priced incoming rate cuts from the Greenspan Fed. The economy was clearly hitting the wall and tech stocks had collapsed into the end of the 2000 (the Nasdaq 100 index was off more than 50% from its early 2000 peak heading into 2001.) Fed Chairman Greenspan didn’t wait for the regularly scheduled meeting for the end of January and slashed rates 50 basis points in a completely unanticipated move on January 3. Equity market bears found themselves ensnared in an epic one-day squeeze that saw the Nasdaq 100 close 18% higher from the previous day on January 4. Tech stocks and the broader market managed to piece together a rally for a few weeks, but were already beginning to roll over in early February despite Greenspan adding another 50 basis points of easing at the end-January FOMC meeting. The bear market was in full swing and the Fed was behind the curve.

The US dollar was in a very different spot in these two historical situations – very strong in 2001 and very weak in 2007. In the earlier case, the US dollar was marginally weaker heading into 2001 after a strong 2000, but firmed again and headed to new cycle highs even as Greenspan launched his aggressive cutting regime, only bottoming out “for good” in 2002 – as it remained a safe haven until it was clear that the bear market bottom was in the rear view mirror. In late 2007 and into mid-2008, the USD continued to weaken on the weight of Fed easing and the thinking that the source of weakness was mostly limited to the US housing market and US banks. But once the global contagion was clear, the USD went vertical – somewhat like the 2001-2003 cycle in that it only turned around the time the equity market bottomed out in March of 2009. 

Chart: NZDUSD – weekly 

An interesting setup for NZDUSD this week as after the potential FOMC earthquake on Wednesday, New Zealand reports its Q1 GDP number a few hours later. Note last week’s sell-off bar entirely engulfing the previous week’s rally of consolidation and also note that we have now worked down the final layers of support stretching back over the last five years. 
Source: Saxo Bank
The G10 rundown

USD- enough said above – again, the main point here is that the US dollar remains strong despite the significant easing priced. Can or will the Fed get ahead of the curve?

EUR – watch out for European Central Bank president Draghi speaking at the ECB forum in Sintra late today to see if he challenges the notion that the ECB has an exhausted policy mandate and lack of further tools. 

JPY – the yen passively tracking long US yields and will likely continue to do so unless the Bank of Japan chooses it’s Thursday meeting to make a new policy point.

GBP – EURGBP poking around at the cycle highs as Tory leadership candidates debated scenarios forcing a hard Brexit while runaway leading candidate Boris Johnson sat out the debate. The next vote takes place tomorrow and over the following days. See our piece from Friday on longer-term trades for sterling as the shape of Brexit is likely to crystallize from the fog in coming months. 

CHF – EURCHF trading at the significant 1.1200 area and risks slipping to 1.10 if  the market doesn’t find encouragement for risky assets this week, after the Swiss National Bank did  little in rhetorical defense against CHF strengthening at last week’s SNB meeting.

AUD – AUDUSD is running out of range and is close to the lowest non-flash crash lows from early 2016 – awaiting the USD response to the FOMC meeting this week.

CAD – USDCAD has done an about face after a period of CAD overachieving and now trades precisely in the middle  of the three-month range ahead of the FOMC this week.

NZD – trading heavily and any risk-negative reaction post FOMC and weak Q1 GDP print from New  Zealand could see new lows for the cycle in NZDUSD in a hurry.

SEK – SEK firmed on the CPI beat last week, but needs to work through 10.60 in EURSEK to make an impression.  Beginning to question the traditional correlation SEK has with risk appetite – more later.

NOK – the price action has gone dead in EURNOK – awaiting Norges Bank guidance after this week’s expected rate hike (yes, hike).

Upcoming Economic Calendar Highlights (all times GMT)

1230 - US Jun. Empire Manufacturing
1400 - US Jun. NAHB Housing Market Index
1700 - ECB’s Draghi to speak in Sintra at ECB Forum
2100 - New Zealand Q2 Consumer Confidence
0130 - Australia Q1 House Price Index
0130 - Australia RBA Minutes
Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-hk/about-us/awards.

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.