It is the decision day, yes, it is today when the Federal Reserve over in the United States will meet and make a decision which will not only have an impact in the U.S. but the ripple effects of this are felt throughout the world. The committee is going to deliver a verdict which is bound to make the president of the United States even angrier. President Trump made it clear in his tweet yesterday he is not pleased with the Fed’s decision. For now, the Fed has decided to brush aside any pressure and maintained their independence.
U.S. central bankers are meeting in Washington and they are expected to raise the interest rates for the last time this year. They have already increased the interest rates three times this year. The Federal Open Market Committee is broadly expected to raise the interest by a quarter point, a range of 2.25 percent to 2.5 percent, the highest in a decade. This is all baked in the markets and traders are not going to be surprised by this decision even though Donald Trump may be.
The Statement
What is more important for today is the policy statement at 2.30 p.m. because it is then when we could hear something new from the Fed. Jerome Powell, the Fed president will provide the forward guidance and he might alter or drop a commitment for any further gradual hikes in 2019.
Investors are clearly betting heavily on this move and it is something which is going to set the tone for the Q1 of 2019. The Fed has achieved their goal of maximum employment and met their inflation target so they are committed to gradually tightened their monetary policy. However, like any other central bank, they want to keep the flexibility in their monetary policy as this helps to avoid unpleasant surprises.
What Is Aggressive & Dovish
Market participants widely expect the statement to be somewhat dovish and the markets believe that going into 2019, the Fed isn’t going to be this aggressive because of the tighter financial conditions. Mr Powell is likely to indicate two or maximum three rates hikes in 2019. For investors, one to two rate hikes would be considered more dovish to neutral but two to three rate hikes would be aggressive because the economic indicators have started to flash warning light with respect to any aggressive monetary policy.
The Trade
In terms of trading the event, aggressive tone by the Fed would be negative for the equity market and the sell-off may become intense. The Dow Jones may take a nose dive and the move could in the range of 300-500 points. However, a dovish statement could support the equity markets and it would restore some confidence so investors expect about 150-250 points move for the Dow on the back of this.
In the forex market, the dollar could easily make another high for the year if the statement is neutral to hawkish. A strong dollar would have the most impact against the euro and sterling, both of them are already very weak because of their internal issues- Brexit and Italian debt situation.
In the commodity space, do not expect the gold price to drop even if the statement is neutral to hawkish because this would trigger a risk-off trade and gold would become a favourable hedge against the risk. I don’t expect the gold price to move below $1,235. On the flip side, if the statement is dovish, the upside would also be moderate and the price may just struggle to touch the $1,265 to $1,270 mark.
