DailyFX
British Pound: Scottish Vote is Close and FX Traders are Nervous
John Kicklighter

DailyFX.com -

Talking Points:

  • Dollar Rallies to 14 Month Highs, S&P 500 Steady After FOMC

  • British Pound: Scottish Vote is Close and FX Traders are Nervous

  • Euro’s Medium-Term Outlook Bearish Regardless of TLTRO Uptake

Dollar Rallies to 14 Month Highs, S&P 500 Steady After FOMC

The FOMC delivered a more hawkish view of the future…but it did so begrudgingly. Nevertheless, the US Dollar took the cue and advanced against all of its major counterparts this past session. From the Dow Jones FXCM Dollar Index (ticker = USDollar), bullish sentiment translated into a 14-month high. Furthermore, when we look across the majors; the progression of the central bank’s commitment to the slow but steady return to a hawkish regime was plain to see. On one extreme, EURUSD – which sees the ECB actively engaged in a dovish policy to expand its balance sheet – dropped 0.7 percent on the day. On the other, even carry currencies with materially higher interest rates like the New Zealand (down 1.3 percent) and Australian dollars (off 1.5 percent) would also lose ground to the US unit.

Where did this bullish / hawkish sentiment originate? The headline – and fully expected – move by the market was the $10 billion ‘Taper’ to the central bank’s QE3 program. Fed Chairwoman Yellen later remarked that the group expects to close out the stimulus program when they next meet on October 29. This particular event’s celebrity was brought on by the unique elements of the quarterly meeting: updated forecasts and the Chair’s press conference. The economic projections – growth, employment and inflation – were little changed. Yet, the central bank didn’t leave traders without cannon fodder. Their interest rate forecasts were materially more hawkish. Of the 17 FOMC members, 14 now expected the first hike in 2015 (in June it was 12). More remarkable, the Fed upgraded its outlook for the rate at the end of 2015 to 1.375 percent (previously 1.13) and the end of 2016 to 2.875 percent (previously 2.50). Substantial.

So, if the Fed is moving steadfastly towards a moderation of its accommodation, why didn’t capital markets respond? With a low rate and high stimulus environment; assumed risk by individuals (volatility) collapsed, investors ventured into riskier assets and used higher leverage. An uptick in the risk profile could unnerve a market that has been extremely complacent. Yet, it didn’t. In part, this is due to Ms. Yellen’s evading a clear view of the Fed’s path and perceptions. That maysave the S&P 500 now, but it only further raises the burden for the inevitable shift.

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