FOMC (Federal Open Market Committee) meeting is due today and this time, the Fed’s decision is not going to be followed by a press conference.
This small clue is enough to interpret that the Fed is not going to hike the rates today. A press conference would otherwise normally follow so that Mrs. Yellen can explain reasons for decisions and next steps. We will have that event in December, and even if they are going to hike rates, it is likely to be a dovish hike where Yellen will downplay the move in the press conference that follows.
It is difficult to imagine a more different economic reality between major economies in the world than the one that exists right now. The United States is growing at a healthy and steady pace and is going for an annual number of around 3%. The Eurozone, Japan, Australia, New Zealand & the UK, all struggle to stay above zero.
Unemployment rates in the United States are approaching its lowest levels in decades while the rest of the world, especially the Eurozone, is still seeing levels above 11%.
The labor participation rate in the US is shrinking. The fact that the initial jobless claims and continuing claims are decreasing on a constant basis, kind of lifts the negative effect on the economy and offset its implications.
To hike rates in a world that is flirting with the concept of negative rates, like the case in the Eurozone, Switzerland, Sweden etc, seems highly improbable. Nevertheless, the Fed is still hinting that a rate hike is appropriate, so we will have to wait and see how it all unfolds. As mentioned at the start of this article, it is unlikely we will have a change in rates today.
The United States is facing another big problem in the days to come, and this may be a game-changer: their debt ceiling limit is about to be reached at the start of November. Without raising the ceiling, the Government will be shut down and the effects will be like a domino for the US economy as well.
In order to understand what the debt ceiling problem is, one has to remember that a government is functioning as a huge enterprise. One that has its own incomes and expenses. When those expenses cannot be paid due to lack of money, the Government must borrow. If that borrowing limit is reached, the Government will have to wait until incomes start to pour in – but in the meantime a shutdown is inevitable.
All in all, it’s going to be a fairly interesting end of the year in the FX markets. The Fed will have the last word with its December meeting. This will be held after the ECB and Draghi’s conference, so the mood of the holidays will be highly dependent on what Mrs. Yellen says at that next Fed meeting.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
