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US dollar wind down on Fed minutes

Released yesterday, Fed minutes wrote ’members said the improvement in labour market conditions met or would soon meet one of the Committee's criteria for beginning policy normalization," but "some indicated that their confidence that inflation would gradually return to the Committee's 2% objective over the medium term had not increased, in large part because recent global economic and financial developments had imparted some restraint to the economic outlook and placed further downward pressure on inflation in the near term."

The Fed have strayed off their well-worn path. The market has lost visibility on Fed’s policy path but the Fed members are not less confused. Unemployment and inflation targets were the foundation of Fed’s policy and these key economic indicators are now diverging from each other. The improvement in unemployment has not led to any acceleration in inflation. The Fed’s ‘data dependency’ is now clearly not restricted to the domestic picture; global macro is now a key tenet to any tightening decision.

The Fed resides at an important junction. The multi-year ZIRP has not given the anticipated result thus the Fed is not in a position to act before a elaborating a more sophisticated road plan. And this situation is keeping the punchbowl on the table.

The dovish Fed minutes sent the US dollar lower against G10 and EM currencies. The US stocks gained in New York; the S&P500 cleared 2000 offers, Dow Jones stepped over 17000 mark. Although a bit steeper, the US yield curve remains subdues on expectation that the Fed will not hike rates this year. The market gives 40% probability for December hike.

Foreign central banks USD holdings decreased by $ 5.154bn, treasuries by $ 4.580bn and agencies by $501mn.

Cable recovered the post-BoE losses rapidly and managed to close the day above its 200-day MA (dovish Fed certainly helped). For a weekly close above 1.5320, the bias should remain on the upside for further advance to 1.5490/1.5500. Having acted as support to post-BoE sell-off, the 1.5250 level (Fib 50% on Apr-Jun rise) could now be considered as a base for further bullish development. Versus the euro, the pound gains some field and further advance to 0.7280/0.7250 could be considered.

AUDUSD bulls gain momentum on the back of dovish Fed minutes and advanced to 0.7300 for the first time since Aug 24. The key level is 0.7380 (Fib 38.2%) below which mid-term traders will continue seeing opportunity in selling the rallies. We shift the support higher to 0.7195 (Fib 23.6%), above which the short-term bullish formation is to stay.

Gold consolidates gains at about its 100-day MA (1142). Dovish Fed and weak US dollar will certainly keep the market above the $1135/40 pivot. Although the momentum is slowing a rebound to $1155 is possible before considering a further advance to $1170/77 (Aug high / 200-day MA). Below 1135/40, we could well retrace to $1122/1112 (Fib 50% / 61.8%).