Kim Cramer Larsson
Join Kim Cramer-Larsson, technical analyst at Saxo Bank, for the latest developments from a chart perspective as we head toward the US presidential election day of November 8.
Article / 20 September 2016 at 14:20 GMT

FOMC outcome: The market is right until it is wrong

FX Consultant / IFXA Ltd
  • Loonie sinking in ocean of crude
  • Bar is set low for a FOMC surprise
  • Oil bears should be cautious

Fried dove on tomorrow's menu? It's happened before. Photo. iStock

By Michael O'Neill

FX trading volumes are lower than normal as traders sit on their keyboards patiently waiting guidance from the Bank of Japan and the Federal Reserve. Oil traders appear less concerned about central bank policies and are focused on Opec officials stating the obvious.

On Monday, Venezuela's oil minister said that the world was producing about 10% more oil than demand required and oil prices dropped. That isn't news. That's why oil prices are where they are. 

The Algiers meeting (Opec informal meeting) is only a week away. Oil bears should be leery of new price support comments ahead of the gathering otherwise they wouldn't be having one.

Will the wait be worth it?

Olympic opening ceremonies are a big deal. At least for the host country that spends tens of millions of tax receipts to showcase their nation, their culture and their artistic talents.

In 1988, it was Seoul, South Korea’s turn to dazzle the world. They had big plans. The grand finale was the release of hundreds of doves to symbolise world peace and then the lighting of the Olympic Cauldron.

The big moment arrived. The doves were set free. The cauldron was lit. And then awe turned to “ick”. The doves flew into the flames.

And that brings us to Wednesday’s Federal Open Market Committee meeting. What will be the fate of those doves? Is Fed Governor Lael Brainard’s “new normal” the prevailing view at the FOMC? 

On September 12, in Chicago, Brainard outlined five features of what she described as the “current economic landscape”. She concluded that “the costs to the economy of greater-than-expected strength in demand are likely to be lower than the costs of significant unexpected weakness.”

In her view, the Fed has all the tools it needs to respond to unexpected strength in the economy but if unexpected weakness arises, the tool kit is limited.

Financial markets agree with her assessment. There is only a 12% probability of a rate hike on Wednesday according to the CME FEDWatch tool.

Is the market view the right view?

The market is always right. Until its wrong. And when that happens the proverbial stinky stuff hits the whirling blades. Wednesday afternoon in New York, could be one of those days.

At least 88% of the market doesn’t believe that the Fed will raise the target range for Fed funds from a very low 0.25-0.50% to a very low 0.50-0.75%.

However, the FOMC may not be part of the 88%. 

Last December they increased rates by 0.25% and suggested another 1% of rate increases in 2016. The Fed has repeatedly stated that the criteria for a rate increase includes a strong labour market and rising inflation.

The US labour market has been strong. Nonfarm payrolls have averaged 232,000 new jobs over the past 3 months and 168,000 new jobs since January. Not too shabby.

Chart: Change in NFP 2016

Source IFXA/Bureau of Labor Statistics

The August inflation rise beat expectations, rising 0.2% vs a forecast for 0.1% gain, month over month.  That is the other key indicator moving in the right direction to support a rate increase. 

Janet Yellen seemed to be on board the rate hike express in August. In between fine dining and nature walks at the Jackson Hole Resort in Wyoming, the chair of the Federal Reserve said in a speech "I believe the case for an increase in the federal funds rate has strengthened in recent months." Afterwards, the vice chair, Stanley Fisher said that Yellen’s comments were a sign of how close the committee was to raising rates.  

Strong employment, rising inflation and the top two Fed officials appear to support a change in the Fed funds range.

The market reaction to a rate hike would be nasty. The US dollar would soar, equities sink and doomsday prophets would dust off their “The World is Ending” signs.

The Fed would claim that they had set the stage for a rate increase for a very long time, a rate hike was justified and its not their fault that the market got it wrong.

The market would cry foul, volatility would rise and losses would be booked. And then it would be over.

A few days later a new debate would start as to whether or not raise would rise. Britain and the Eurozone didn’t implode when the Brexit vote was tallied and that result was a far bigger surprise to the world than a minuscule 0.25% US rate hike would be.

The answer to the "who is right or who is wrong" question will be revealed Wednesday afternoon.

— Edited by Clare MacCarthy

Michael O'Neill is an FX consultant at IFXA Ltd. 


The Saxo Bank Group entities each provide execution-only service and access to 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 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 Bank Group by which access to 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 Bank 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 Bank 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 or as a result of the use of the Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. When trading through your contracting Saxo Bank Group entity will be the counterparty to any trading entered into by you. 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 Bank Group and should not be construed as a record of ourtrading 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 Invetment Research
- Full disclaimer

Check your inbox for a mail from us to fully activate your profile. No mail? Have us re-send your verification mail