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From the Floor: Increasingly 'lame duck' Fed kept policy steady

  • • FOMC kept policy and dot-plot rate forecasts basically unchanged
  • • FOMC kept December hike on the table
  • • Fed is increasingly a 'lame duck' as leadership changes loom
  • • Bank of Japan kept policy unchanged
  • • Markets await PM May's Brexit speech on Friday
  • • Gold lower as FOMC keeps dot plot unchanged
  • • Gold finds support at critical level despite stronger USD and higher real yields
  • • 'Rocket man' vs 'Barking dog' show fuels safe-haven and diversification support 
  • • Crude oil stuck in a battle between bulls and bears
  • • Stronger USD could be a catalyst for Japanese equities

Saxo Strats banner
 By John Acher

The US Federal Reserve, whose policymaking committee is increasingly turning into a "lame duck" as leadership changes loom, held policy basically steady on Wednesday, with only minor changes to the dot-plot rate forecasts and kept a December rate rise on the table.

"The FOMC was really no news in terms of the economic policy adjustments and the dot plot," says Saxo Bank's FX strategy chief John J Hardy. "They kept the December rate hike on the immediate forecast […] the market is still playing catch-up."

The uneventful FOMC statement was interpreted as mildly hawkish relative to market expectations, and the US dollar firmed on the news. If there was any surprise, it was primarily that the committee kept its dot-plot forecasts for 2018 unchanged as well, says Hardy.

Source: Saxo Bank

The Bank of Japan also kept monetary policy unchanged at its meeting on Thursday.

Gold tracked lower after the FOMC announcement.

An increasing gap has opened up between market expectations and the FOMC forecasts, which amounts to a 50-75 basis points difference in the rate outlook for 2018, and, with leadership changes looming, the Fed looks like it has no motivation to bridge that gap, says Saxo Bank's head of commodities strategy Ole Hansen.

“The Fed is increasingly at risk of becoming a lame duck,” says Hansen.

Diversification demand continues to support gold prices amid the squabble between the US and North Korea, which has turned into a showdown between "Rocket Man" and "Barking dog."

Gold is finding support at a critical level, but remains at risk of a correction. "We could see a deeper correction based on the positioning in the market. The downside risk is probably the greatest in the market," Hansen says.

Meanwhile, crude oil is stuck in a battle between bulls and bears, he says.

Financial-sector stocks could get a lift from the higher rate outlook, while Japanese stocks could benefit from a further strengthening of the dollar, says Saxo's equities strategy chief Peter Garnry.

"If we could see the dollar strengthening further from here, it could be a positive catalyst for Japanese equities,” says Garnry.

Garnry also noted that Reuters reported on Wednesday that Italian bank UniCredit is interested in talks to acquire Germany's Commerzbank in an all-share deal.

And, finally, financial markets await a key speech by British prime minister Theresa May on Friday when she is expected to lay out what Britain sees as a reasonable "divorce" from the EU.

Theresa May
 The UK prime minister Theresa May is scheduled to 
hold an important Brexit speech on Friday.

John Acher is a consulting editor at TradingFloor

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