Fed Raises Rates, SNB On Hold
Swissquote Bank Ltd | Dec 15, 2016 08:01AM ET
Forex News and Events
Don’t be fooled by forecasts
As widely expected, the FOMC increased interest rates by 25bsp, raising the target range for the federal funds rate to 0.50% - 0.75%. After weakening substantially ahead of the decision, the US dollar appreciated against most of its peers as Fed Chair Yellen unveiled a hawkish shift in the dots chart. Indeed, the market had plenty of time to price in the second interest rate hike of the cycle, exactly one year after the Fed started the normalisation process. However, the market only expected two interest rate hikes in 2017, while the Fed dot plot showed that a third tightening move was expected by the committee.
Looking at the statement, the committee made some minor changes, mostly hawkish ones, as it acknowledged the recent improvement of realised and expected labour market conditions and inflation. The unemployment rate dipped to 4.6% in November and reached what the Fed calls “structural” unemployment rate. In addition, the inflation outlook has improved substantially (even before the election of Donald Trump) with the core personal consumption expenditure measure continuing to drift higher (1.7%y/y in October), while the headline measure rose sharply amid a recovery in commodity prices.
In spite of this hawkish shift in the expected path of Fed policy in 2017-2019, we think it useful to recall that just like this year, the path of policy will be data-dependant. And according to historical data, the Fed has been most of the time pretty inaccurate when trying to predict its own monetary policy path. Remember that Fed members expected four rate hikes this year. Therefore, we believe that the market is once again getting ahead of itself (thanks to Trump who has boosted market expectations with his unknown fiscal stimulus plan) and has become overly optimistic on the US outlook against the backdrop of mixed economic data and highly uncertain political outlook.
Indeed, recent economic data has been rather disappointing and has failed to confirm the good figures released in October. In November, the improvement in the unemployment rate was mostly due to a drop in the participation rate which returned to 62.7%. Average hourly earnings contracted 0.1%m/m, while on a year-over-year basis the gauge eased to 2.5% from 2.8% in the previous month. Headline retail sales widely missed consensus, rising 0.1%m/m versus 0.3% expected, while the measure excluding auto and gas rose 0.2%m/m versus 0.4% expected. Finally, industrial production contracted 0.4%m/m in November which brought the 6-month average close to negative territory, suggesting that there is still substantial slack in the sector.
SNB holds
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The SNB held its 3-month LIBOR target range at -0.25 to -0.1.25% as widely expected. In the accompanying monetary policy assessment the SNB indicated that they view the CHF as overvalued and that they will continue to intervene in FX markets. The statement went on to mention that SNB action in the FX markets was intended to make “Swiss franc investments less attractive.” The inflation forecasts were revised marginally downward from September’s report, in the short term but recovering in 2017 from a revision lowered to 0.1% from 0.2%. Mentioning the US economic acceleration, the SNB indicated that the global economy continued to recover in-line with forecasts, while the spillover effects from Brexit were less than originally predicted. On the brighter external environment the SNB forecasted GDP growth at “roughly” 1.5% in 2017. The unexpected shift in the Fed's “dots” has failed to relieve pressure from the CHF as the SNB is primarily focused on EUR/CHF pricing. Significantly Fed-driven selling in EURUSD has pressured EUR/CHF to 1.07307. Given the rise in inflation, the SNB is likely to accept a small amount of EUR/CHF deprecation but very minimal. Due to mounting event risks in Europe in the mid and long term, CHF will continue to gain versus EUR posing a significant problem for Swiss policy makers. With official FX reserves over 100% of GDP meaningful FX intervention is likely however, with negative interest rates already damaging bank balance sheets and consumer saving more negative rates are not a palatable option.
GBP/USD - Monitoring Uptrend Channel.
The Risk Today
EUR/USD has collapsed below 1.0500 amid the Fed meeting. Yet, hourly resistance is far away given at 1.0874 (08/12/2016 high). Support at 1.0506 (05/12/2016 low) has been broken. Expected to further consolidate. In the longer term, the death cross late October indicated a further bearish bias. The pair is monitoring key support given at 1.0458 (16/03/2015 low) is on target. Key resistance holds at 1.1714 (24/08/2015 high).
GBP/USD is still lying within uptrend channel. Hourly support is given at 1.2302 (18/11/2016 low). Expected to bounce back towards resistance at 1.2771 (05/10/2016 high). The long-term technical pattern is even more negative since the Brexit vote has paved the way for further decline. Long-term support given at 1.0520 (01/03/85) represents a decent target. Long-term resistance is given at 1.5018 (24/06/2015) and would indicate a long-term reversal in the negative trend. Yet, it is very unlikely at the moment.
USD/JPY's bullish pressures have increased strongly. The pair has finally broken strong resistance area at 116.00. Hourly support can be found at 114.74(12/12/2016 low). Stronger support lies at 112.88 (05/12/2016 low). The technical structure suggests further strengthening towards 120.00. We favor a long-term bearish bias. Support is now given at 96.57 (10/08/2013 low). A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems absolutely unlikely. Expected to decline further support at 93.79 (13/06/2013 low).
USD/CHF has surged amid the Fed meeting. Key support is given at the parity. Hourly resistance at 1.0205 (30/11/2016 high) has been broken. Expected to consolidate. In the long-term, the pair is still trading in range since 2011 despite some turmoil when the SNB unpegged the CHF. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours nonetheless a long term bullish bias since the unpeg in January 2015.
Resistance and Support:
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