cptradingeducation

Data Dependant FED

August 7, 2015

FED has insisted everytime, since the liftoff talks began, that any kind of rate hike is data dependant but nevertheless, the market has created clear time targets, such as September & December meetings to be the potential beginnings of the new tightening cycle. In itself, those time-targets are perfectly reasonable because it is highly unlikely that the FED would hike the rates on meeting that is not followed by the press conference. However, this does not mean that we can or should ignore the data because two days ago, Atlanta FED issued a strong warning signal that the 3rd quarter GDP is not going to be very pretty.

Atlanta FED projected the Q1 and Q2 GDP figures very accurately which means there are reasons to be concerned when their first Q3 projection is only 1.0%. Clealry it is too early to make any large scale decisions based on that info but regardless of that, we should keep that figure in mind.

If indeed, the 3rd quarter GDP figure is going to be close to 1.0%, then the FED & USD bulls have a big problem on their hands. If the overall growth is that weak then the FED has no other choice but to postpone the lifoff, most likely until the end of 2015 (minimum). That in turn would have a huge impact on USD because all the gains US dollar has achieved this year are largely based on the hopes that the FED will start a new tightning cycle, sooner rather than later.

All in all – one thing is quite sure – we are heading into a very volatile Autumn where expectations are extremely high on both sides of the market. Furthermore at moment no one knows how much of the possible first rate hike is already price in, in US dollar pairs. Some suggest that we’ll only see a complimentary spike higher in USD after the release and then begins the long-waited larger correction. But to find out, we need to wait until the September FOMC meeting.

Capital Properties FX
07.08.2015
Kaarel.