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From the Floor: Markets look to FOMC for new rate guidance

  •  USD widely on the defensive ahead of FOMC 
  • FOMC announcement due at 1800 GMT, with Yellen news conference at 1830 GMT 
  • 'My bias is to lean a little bit more towards hawkish potential': Hardy 
  • Fed likely wants to keep some medium-term credibility for further rate hikes: Hardy 
  • Gold prices boosted by Trump's fiery speech in UN Security Council on Tuesday 
  • Poor Jefferies result could weigh on financial stocks: Garnry
(Note: Publication of this article was unfortunately delayed today by a technical issue.)

By John Acher

Financial markets keenly await the outcome of Wednesday's Federal Open Market Committee meeting, especially for possible new signals on where rates are headed, and Saxo Bank's FX strategy chief John J Hardy says he is leaning towards the chance of a slightly hawkish message from the FOMC.

No change in rates is expected when the FOMC makes its announcement at 1800 GMT, followed by Fed chief Janet Yellen's news conference at 1830. Instead, the markets will be focused on the Fed's guidance and any further information about its plans for balance-sheet unwinding.

“My bias is to lean a little bit more towards hawkish potential,” says Hardy, noting that the US dollar is on the defensive across the board ahead of this FOMC meeting. (Read also Hardy's latest FX Update here on TradingFloor.)

“There are a couple of questions from the market: the main one is the degree to which they are going to adjust their forward rate guidance," he says.

Markets already know that the Fed are about to announce quantitative tightening, and also the schedule of that quantitative tightening is largely known, starting with a $10 billion unwinding of the balance sheet every month, probably from October 1, says Hardy.

“What could see a bit more hawkish potential is, of course, the clearing on the political front -- Trump showing some ability to wheel and deal with the Democrats," Hardy says, adding that the danger of a political fight over the debt-ceiling has receded, and, Trump's political deal-making could result in something of a fiscal impulse some time next year, maybe even tax reform.
“I think the Fed will want to keep at least some credibility for the medium-term outlook for further rate hikes,” he says.

“So, maybe a smaller-than-expected adjustment lower on the forecasts on the so-called dot plot, or no adjustment at all, or just simply a bigger dispersion as the doves think it is not going to happen, whereas the hawks stick to their guns, could be seen as more hawkish, and we could see a bit of a dollar relief rally, after all it has been a pretty long and brutal selloff for the dollar for some time now," Hardy says.

EURUSD. The USD is largely on the defensive going into the FOMC meeting
EURUSDSource: Saxo Bank  

Reuters reported on Tuesday that hawks and doves in the European Central Bank are divided over whether to set an end-date for their money-printing programme when they meet in October, raising the prospect that they will keep open at least the option of prolonging it again.
Doves may be growing frustrated with the euro above $1.20, the report, citing unnamed sources, said.

In the bond markets, yields on a global scale creeping a bit higher, says Saxo Bank's fixed-income strategy chief Simon Fasdal.

"So it is all about balance sheet reduction,” Fasdal says, referring to the FOMC meeting. "We believe that the stronger macro [economic situation] lately will impact the messages, but inflation is still subdued in the US and especially in Europe."

Meanwhile, gold prices got a bit of a boost from US president Donald Trump's fiery speech in the United Nations Security Council on Tuesday.

"His threat to wipe out the Rocket Man has brought back some geopolitical risk," says Saxo's head of commodities strategy Ole Hansen, referring to Trump's swipe at the North Korean leader.
"The risk of a snap move remains to the downside at this stage because there has been such a build-up in speculative longs," Hansen says, adding that gold is holding above support at $1,300/oz, but a break above $1,325/oz would be needed to ease long liquidation risks .

Silver is bouncing after retracing 38.2% of its July-to-September gains, while platinum’s discount to gold has widened to a new record of $357, Hansen says.

Crude oil is struggling to break higher despite a report on Tuesday from the American Petroleum Institute that showed a smaller-than-expected stock build, which puts the focus on today's inventory report from the US Energy Information Administration.

WTI crude oil is stuck in a $49.20 to $50.50/barrel range , Hansen says.

In the equity markets, poor third-quarter results for the Jefferies Group on Tuesday could weigh on financial stocks on Wednesday, says Saxo's equities strategy chief Peter Garnry. "There are some big forces holding back trading income," he says.

FedEx's first-quarter results disappointed the market, while Adobe's third-quarter result was good… but its shares still fell 3% in aftermarket trading due to a cautious outlook, Garnry says.

Markets await fresh messages from Fed chief Janet Yellen. Photo: The Fed

John Acher is a consulting editor at TradingFloor

a bit late today?


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