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As expected, the Fed maintained the target range unchanged at 0.50%-0.75% and made no major changes to the FOMC statement. Unfortunately, the statements usually do not change much from meeting to meeting and as this was one of the small meetings without updated projections or a press conference, we did not get any significant news on the Fed's economic outlook or when to expect the next Fed hike. The market reaction was very muted.

That said, the Fed could have turned either more hawkish or dovish at the meeting but we have to wait for upcoming Fed speeches and/or the minutes to find out. It would not be the first time that the minutes would reveal big discussions after a 'boring' statement.

Based on the December meeting, the Fed still awaits more information about Trumponomics as 'almost all' FOMC members think there are upside risks to their growth forecasts from the expectations of more expansionary fiscal policy. Thus the 'dots' may be revised up next time if we get more information about Trump's actual economic policy.

We still expect two Fed hikes this year (in June and December) but the probability of a third hike has increased due to a combination of strong US data and a more hawkish Fed at the December meeting. Given the Fed did not give any guidance on when to expect the next Fed hike, a hike already in March now seems unlikely, as the Fed has begun to prepare markets for upcoming hikes. A hike could come in May if the economy continues to surprise on the upside and markets stay calm.

Our triggers for Fed hikes this year are still 1) higher wage growth, 2) less labour market slack, 3) higher actual core inflation and 4) possible information on Trump's actual economic policy.

Markets have priced in two hikes this year, the first one in June. The markets think there is almost a 50% probability of a hike in May.

We expect three to four hikes in 2018, as Trump's economic policy is expected to have the biggest growth impact next year. Markets have priced in two additional hikes next year, so there is still room for higher rates, in our view.

The Fed signalled three hikes both this year and next year in the latest projections from December.

Due to technical difficulties, this is a very short and limited FOMC review without many accompanying charts. We are sorry for the inconvenience. As we only got limited information at the meeting, please see our FOMC preview: Fed is still waiting for news on Trumponomics for more information about our current Fed views.

What the Data Gives the FOMC Takes Away

Last night's US data dump left more than a few investor's tongues wagging. ADP exceeded even the most optimistic of estimates while the US ISM data printed robustly across the main categories. On the other hand, the FOMC came off a tad dovish as the Fed continues to describe business investment as being 'soft'. The balance of their view remains mostly unchanged. As expected, the statement was not designed to light a fire under a potential rate hike at the March FOMC meeting, although the overall surging ADP data has added a bit of fuel to the debate. However, I caution reading too much into the ADP data as it does not necessarily correlate to an NFP surprise.

US equity index remains relatively unchanged on the day, while US Government Bond yields have firmed and offered some support to a struggling greenback after an up and down session. US dollar was initially backed by US economic data while the dovish FOMC wiped out the dollar momentum.

On the rates front, the market is currently pricing around 25% of a move in March, 40% by May and approximately 80% by June. However, if we see a strong showing on Friday's NFP data, it would lead the market to increase its March expectations

Australian Dollar

Desperately seeking a trend, best describes the Aussie dollars' fortunes this week. No matter what side of the coin you are on, it been a tough grind on either flip. Overnight, the bullish US economic data was tempered by a dovish FOMC, and Aussie fortunes shadowed the more general US dollar momentum. But with the greenback unable to exploit on the stronger data, the Aussie should remain firmly bid on dips.

If we were looking for an opening, the soaring December Australia Trade Balance might have provided one, coming in at a record 3.5 billion versus 2.0 billion A$ expected. This print is a pretty big number and very hard to ignore. The desk focus now shifts to the always critical .76.25-35 congested zone.

Keep in mind as the market continues to debate the course of US FX policy, it will take little more than another bully shove from President Trump to send the greenback toppling again.

Japanese Yen

Mixed NY session for the greenback which surged to around USDJPY 113.90/95 after the ISM and ADP data but failed to hold onto gains and then slipped on the dovish FOMC. To be honest, the initial move higher was so weak; traders acted out of habit and were quick to sell the dollar back for a small profit.

The Trump Fear Factor has left it is footprint all over the USDJPY view. The US administration's protectionist rhetoric that the real threat trade conflict is ruinous to the USDJPY upward momentum. The correlation to higher US bond yields is eroding while the markets acuteness to softer yields accelerates. Very much an asymmetrical risk trading USDJPY off US bond yields in this market. As such, the upside is fraught with peril in this environment

Chinese Yuan

Tension continues to heighten on the US Trade front. Investor and corporations are frustrated over the PBoC's iron-fisted controls over capital outflows., so much so the market is turning into and over a regulated quagmire, and if the PBoC continues down this road, they will severely erode investor confidence. How local business seeks to brand globally, given these kerbs on capital outflow is beyond comprehension.

On the currency market front, the CNH continues to trade off broader US moves. The markets remain glued to development in the US, which are predictably impacting global investor sentiment.

EM Asia

Relative peace on the Ringgit front, likely due to the Lunar New Year as much of the local APAC FX space has been lacking liquidity.

Despite pockets of support, it was difficult to shake my long standing bearish base case scenario. Forget the dovish Fed lean; we have grown to expect that from this sitting of FOMC when geopolitical risk flares. However, we should be focusing on the US economic data which has for the most, part been supportive to higher US interest rates and this is where my bearish view lies. With the US Bond yields tipped to move higher on the first hint of Fiscal Policy, it is hard to envision the local currencies holding in over the long run.

The KRW has been the star of the region of late as the currency has been able to shift aside the waves of protectionism despair as cheap valuations on the local equity market continue to attract portfolio inflow. As for proper measures, January's trade produces stellar export growth +11.2%(YoY), the first double-digit growth since January 2013. The pretty stellar number is hard to ignore as are the cheap equity valuations.

Information received since the Federal Open Market Committee met in December indicates that the labor market has continued to strengthen and that economic activity has continued to expand at a moderate pace. Job gains remained solid and the unemployment rate stayed near its recent low. Household spending has continued to rise moderately while business fixed investment has remained soft. Measures of consumer and business sentiment have improved of late. Inflation increased in recent quarters but is still below the Committee's 2 percent longer-run objective. Market-based measures of inflation compensation remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will rise to 2 percent over the medium term. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments.

In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1/2 to 3/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a return to 2 percent inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee's holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Patrick Harker; Robert S. Kaplan; Neel Kashkari; Jerome H. Powell; and Daniel K. Tarullo.

Source

US crude has posted gains in the Wednesday session. In North American trade, US crude futures are trading at $53.44. Brent crude futures are trading at $55.90, as the Brent premium stands at $2.46. On the release front, ADP Nonfarm Payrolls sparkled with a gain of 246 thousand, well above the forecast of 165 thousand. ISM Manufacturing PMI improved to 56.0, beating the forecast of 55.0. Later in the day, the Federal Reserve issues a rate statement and set the benchmark rate, which is expected to remain pegged at 0.50%. On Thursday, the US will release the weekly unemployment claims report.

US crude stockpiles continue to post surpluses. On Wednesday, Crude Oil Inventories soared, with a surplus of 6.5 million barrels. This was much higher than the estimate of 2.6 million. This marked a fourth straight surplus, each of which handily beat the market forecasts. US oil drilling has been on the increase, and more US production could offset the recent Russia/OPEC agreement which is aimed at reducing global oil supplies by some 2 percent. Analysts say that compliance by producers which signed the agreement has been high, but the deal, which went into effect on January 1, has not led to higher oil prices one month later.

The Federal Reserve is on center stage on Wednesday, as the bank releases a policy statement. After a historic quarter-point raise in December, which pushed rates to 0.50 percent, the Fed is expected to remain on the sidelines in its first release of 2017. What happens next? Just a few weeks ago, Fed officials were talking about a series of rates hikes in 2017 in response to a strong US economy (sound familiar? Please rewind to January 2016 for an identical message). However, after just 10 days on the job, President Trump has proven to be as unpredictable and controversial as ever. Trump has not provided any details about his economic blueprint for the country, but he has raised the rhetoric about "America first" and has already picked a fight with Mexico over a border wall and his threat to renegotiate the NAFTA trade agreement. After hinting at gradual rate increases, the Fed will likely change gears and adopt a wait-and-see attitude, watching what bills Trump gets through Congress and how the economy responds. If economic growth remains strong, a rate hike in the first half of 2017 will have to be seriously considered by the Fed. The markets have priced in a rate hike by June at 66 percent.

The Institute for Supply Management (ISM) manufacturing index rose 1.5 points to 56 in January. This marks the fifth consecutive month of expansion in the U.S. manufacturing sector with the pace of expansion strongest in more than two years. The reading was above consensus expectations for a less pronounced uptick to 55.

Almost all subcomponents rose in January, with employment registering the largest advance (+3.3 to 56.1), followed by prices (+3.5 to 69), and production (+2.0 to 61.4). Declines were observed in new export orders (-1.5 to 54.5), imports (-0.5 to 50), and customers' inventories (-0.5 to 48.5).

The spread between new orders and inventories - a leading indicator of activity - narrowed slightly in January to 11.9 (December: 13.3) but remains elevated. This suggests that momentum in the expansion of manufacturing activity is likely to continue in the coming months, albeit at a slightly more subdued pace.

Twelve of the eighteen industries reported expansion in January, with plastic and rubber products, miscellaneous manufacturing, and apparel, leather and allied products registering as the top three categories driving growth during the month.

Key Implications

The U.S. manufacturing sector remained in solid expansionary mode at the start of the year, rising to the quickest pace in over two years. There are few areas of concern, particularly given the inventory overhang, with both producer and customer inventories, as well as the backlog of orders remaining in contractionary territory. Comments by survey respondents were generally positive, however, with few signs that global events have had a material impact on demand. Nevertheless, one respondent in the machinery industry did mention that they were concerned that import restrictions on hot rolled steel were beginning to result in supply shortages. Supply disruptions and potential shortages may become more of a concern to U.S. manufacturers should the new U.S. administration follow through with its threats to impose protectionist trade measures.

Price growth in January recorded its fastest pace of advance since the spring of 2011. Price growth was driven up by higher commodity prices, a factor that will contribute strongly to the rise in headline producer and consumer prices through 2017. It should be noted that this price growth will largely be viewed as transitory by the FOMC, as the core measures of consumer prices that policymakers monitor closely are expected to remain muted and still below its 2% target.

Today's data will have little implications for the FOMC's interest rate decision this afternoon, but continues to feed into the narrative of above trend growth in the U.S. economy, with a corresponding gradual absorption of excess capacity. While the FOMC is largely expected to remain on hold today, we anticipate that the gradual process of monetary policy normalization currently underway in the U.S. will see the policy rate rise once in the first half of the year, with anther 25bps hike slotted in before year end.

GBP/USD has posted slight gains on Wednesday, continuing the upward movement which marked the Tuesday session. In North American trade, the pair is trading just above the 1.2630. On the release front, British Manufacturing PMI came in at 55.9, matching the forecast. ADP Nonfarm Payrolls sparkled with a gain of 246 thousand, well above the forecast of 165 thousand. ISM Manufacturing PMI improved to 56.0, beating the forecast of 55.0. Later in the day, the Federal Reserve issues a rate statement and set the benchmark rate, which is expected to remain pegged at 0.50%. On Thursday, it's a very busy day in the UK. Construction PMI is the first order of business, followed by the BoE, which will publish its inflation report and set the benchmark interest rate. The US will release unemployment claims.

British inflation indicators jumped in the second half of 2016, boosted by a weaker pound which crashed as much as 20% after the Brexit vote in June. Still, the BoE appears in no rush to raise interest rates, at least for now. The bank is expected to maintain rates at 0.25%, where they have been pegged since last July. Analysts will be combing through the BoE inflation report, which could provide hints about future interest rate moves. The British economy continues to perform well despite tensions with Europe over Brexit. On Tuesday, Manufacturing PMI indicated expansion in the manufacturing sector, and this week's Construction and Services PMIs are expected to follow suit and point to expansion.

All eyes are on the Federal Reserve, which will release a policy statement later on Wednesday. After a historic quarter-point raise in December, which pushed rates to 0.50 percent, the Fed is expected to remain on the sidelines in its first release of 2017. What happens next? Just a few weeks ago, Fed officials were talking about a series of rates hikes in 2017 in response to a strong US economy (sound familiar? Please rewind to January 2016 for an identical message). However, after just 10 days on the job, President Trump has proven to be as unpredictable and controversial as ever. Trump has not provided any details about his economic blueprint for the country, but he has raised the rhetoric about "America first" and has already picked a fight with Mexico over a border wall and his threat to renegotiate the NAFTA trade agreement. After hinting at gradual rate increases, the Fed will likely change gears and adopt a wait-and-see attitude, watching what bills Trump gets through Congress and how the economy responds. If economic growth remains strong, a rate hike in the first half of 2017 will have to be seriously considered by the Fed. The markets have priced in a rate hike by June at 66 percent.

Daily Pivots: (S1) 1.0717; (P) 1.0764 (R1) 1.0845; More.....

Intraday bias in EUR/USD remains mildly on the upside for the moment. The choppy rise from 1.0339 is still in progress and could target 1.0872 resistance. At this point, we're still viewing choppy rise from 1.0339 as a corrective move. Thus, upside should be limited by 1.0872 resistance and bring reversal. On the downside, break of 1.0619 will indicate that such rise is completed and turn bias to the downside for retesting 1.0339 low.

In the bigger picture, whole down trend from 1.6039 (2008 high) is in progress. Such down trend is expected to extend to 61.8% projection of 1.3993 to 1.0461 from 1.1298 at 0.9115. On the upside, break of 1.1298 resistance is needed to confirm medium term bottoming. Otherwise, outlook will stay bearish in case of rebound.

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Daily Pivots: (S1) 1.2460; (P) 1.2528; (R1) 1.2644; More...

GBP/USD rebounds further today but stays below 1.2673 so far. Intraday bias remains neutral. Overall, rise from 1.1986 is seen as the third leg of the consolidation pattern from 1.1946. Above 1.2673 will turn bias to the upside and extend such rise towards 1.2774 resistance. We'd expect strong resistance from there to limit upside and bring down trend resumption eventually. On the downside, firm break of 1.2414 minor support will argue that it's completed and turn bias to the downside for 1.1946 low.

In the bigger picture, fall from 1.7190 is seen as part of the down trend from 2.1161. There is no sign of medium term bottoming yet. Sustained trading below 61.8% projection of 2.1161 to 1.3503 from 1.7190 at 1.2457 will target 100% projection at 0.9532. Overall, break of 1.3444 resistance is needed to confirm medium term bottoming. Otherwise, outlook will remain bearish.

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Daily Pivots: (S1) 111.91; (P) 112.94; (R1) 113.80; More...

Intraday bias in USD/JPY remains mildly on the downside for the moment. The choppy decline from 118.65 is still in progress and could target 8.2% retracement of 98.97 to 118.65 at 111.13. At this point, we're still viewing the fall as a corrective move. Hence, we'd expect strong support from 111.13 to contain downside an bring rebound. On the upside, above 115.36 resistance will argue that such correction is finished and turn bias to the upside for 118.65. Break will resume whole rise from 98.97 and target 125.85 key resistance.

In the bigger picture, price actions from 125.85 high are seen as a corrective pattern. The impulsive structure of the rise from 98.97 suggests that the correction is completed and larger up trend is resuming. Decisive break of 125.85 will confirm and target 61.8% projection of 75.56 to 125.85 from 98.97 at 130.04 and then 135.20 long term resistance. Rejection from 125.85 and below will extend the consolidation with another falling leg before up trend resumption.

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Daily Pivots: (S1) 0.9907; (P) 0.9975; (R1) 1.0018; More.....

Intraday bias in USD/CHF remains on the downside for the moment as decline from 1.0342 is still in progress. Such fall is seen as the third leg of the pattern from 1.0327 and should now extend to 61.8% retracement of 0.9443 to 1.0342 at 0.9786 and below. On the upside, break of 1.0043 resistance is needed to indicate short term bottoming. Otherwise, outlook will stay mildly bearish in case of recovery.

In the bigger picture, rejection from 1.0327 resistance suggests that consolidation pattern from there is still in progress. Fall from 1.0342 is seen as the third leg and retest of 0.9443/9548 support zone could be seen. But we'd expect strong support from there to contain downside. At this point, we're still expecting the larger rally to resume later to 38.2% retracement of 1.8305 to 0.7065 at 1.1359.

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