Capital Properties FX
Capital Properties FX

FOMC Statement Reveals Nothing

The beginning of a new month is always a refreshing moment in the foreign exchange market. The first week of November was filled with market-moving events. And in addition, we had the pleasure to read the same old FOMC statement again. Since we had plenty of releases, let’s go over them one by one, starting with the Federal Reserve.

Like many of us expected, the Federal Reserve kept the Federal Funds Rate unchanged at 0.50 percent. The statement itself didn’t reveal anything new either but it said enough to keep the December rate hike hopes firmly anchored. This time, there were only two members who voted to raise the rates immediately.

In the bigger picture, the FOMC statement was pretty much the same as it has been for quite some time. While I don’t want to speculate over the possible policy change in December, it seems that the FED doesn’t need very much to move forward with the tightening cycle. The inflation figures are not going to improve dramatically in a month period and at the same time, the labor market won’t collapse either. Hence, if they really want to hike the rates, they shouldn’t have much problem doing it before the year ends.

FOMC  Statement

U.S. Elections – The Wild Card

I’m sure many of you have gotten an email from your broker saying that there will changes in trading conditions next week. On Tuesday, Americans have to decide who is going to run their country for the next four years. While they have plenty of candidates to choose from, two of them tend to stand out and it looks like the market only favors one of them.

It is quite possible that the overall weakness in USD has been caused by the uncertainty of the outcome of the elections. The latest polls show that Trump and Clinton have pretty much the same support percentage and unless something changes, then one of them is going to win. However, it seems that the market is not fond of Trump because nobody knows what he might do in the long run. Also, keep in mind that the Chair of the FED is also appointed by the president. This creates a situation where we might see some changes in the Federal Reserve as well.

All in all, taking into account the latest price action, the weakness in the dollar, the non-existent reaction to the FOMC statement and NFP – it’s clear that the market is worried about something else. Furthermore, we don’t know how much influence has the outcome of the elections to the Federal Reserve. Of course, in theory, FED is an independent structure but in real life, things are probably not that straight forward. In other words, the December rate hike possibility is also (somewhat) connected to the elections.

Job Creation is Still Solid

There are two main things that the FED looks very closely – the labor market and inflation. While the overall inflation in the U.S. still runs below the 2 percent target, the job creation is flexing its muscles. On Friday, the NFP came in at 161K which is undoubtedly a strong result, given the fact that the unemployment rate is again back below 5 percent.

Furthermore, the previous month figure got a healthy revision to the upside from 156K to 191K. This means that the average monthly NFP from 2014 to today is approximately 212 000 new jobs per month. You can look at this figure from whatever perspective you like but it doesn’t change the fact that it is a very strong result.

Meanwhile, the PMI’s weren’t so beautiful. ISM non-manufacturing PMI dropped all the way from 57.1 to 54.8. The weakest link of the report was the employment component. That, in turn, was a good hint that the NFP may also come in somewhat lower than expected.

ISM Manufacturing PMI, on the other hand, came in slightly higher compared to the previous month but that’s not enough. Since October 2015, we’ve been hovering around the 50 level there – sometimes above it, sometimes below it. In the long run, that is not a good sign and it shows that the expansion in the sector is relatively weak.

Regarding next week, everything comes down to the U.S. elections. Until Wednesday and possibly until the end of the week, economic data releases should be considered as secondary events. As the outcome of the elections is basically a coin flip, we must be prepared for violent price spikes in USD related pairs. Reducing your risk ahead of Tuesday is the smartest thing one can do!