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For the 24 hours to 23:00 GMT, the GBP rose 0.06% against the USD and closed at 1.2760, after UK's ILO unemployment rate remained steady at a 42-year low level of 4.6% in the three months ended April, meeting market expectations. However, the nation's average earnings including bonus advanced less-than-expected by 2.1% on an annual basis in the February-April 2017 period, rising at its slowest pace since February 2016, intensifying concerns about the outlook for consumers as inflation accelerates to a four-year high level. Markets anticipated average earnings to gain 2.4%, following a revised rise of 2.3% in the January-March 2017 period.

In the Asian session, at GMT0300, the pair is trading at 1.2747, with the GBP trading 0.1% lower against the USD from yesterday's close.

The pair is expected to find support at 1.2708, and a fall through could take it to the next support level of 1.2669. The pair is expected to find its first resistance at 1.2802, and a rise through could take it to the next resistance level of 1.2857.

Looking ahead, the Bank of England's (BoE) interest rate decision, due in a few hours, would possibly remain a low-key affair as the central bank is unlikely to be hawkish amid heightened political and economic uncertainty.

The currency pair is trading below its 20 Hr moving average and showing convergence with its 50 Hr moving average.

For the 24 hours to 23:00 GMT, the USD declined 0.65% against the JPY and closed at 109.35.

In the Asian session, at GMT0300, the pair is trading at 109.56, with the USD trading 0.19% higher against the JPY from yesterday’s close.

The pair is expected to find support at 108.81, and a fall through could take it to the next support level of 108.07. The pair is expected to find its first resistance at 110.32, and a rise through could take it to the next resistance level of 111.09.

Moving ahead, traders would anxiously await the Bank of Japan’s (BoJ) monetary policy decision, scheduled tomorrow.

The currency pair is showing convergence with its 20 Hr moving average and trading below its 50 Hr moving average.

For the 24 hours to 23:00 GMT, the USD rose 0.26% against the CHF and closed at 0.9713.

In the Asian session, at GMT0300, the pair is trading at 0.9712, with the USD trading slightly lower against the CHF from yesterday's close.

The pair is expected to find support at 0.9657, and a fall through could take it to the next support level of 0.9601. The pair is expected to find its first resistance at 0.9752, and a rise through could take it to the next resistance level of 0.9791.

Ahead in the day, investors will await the announcement of Swiss National Bank's (SNB) interest rate decision.

The currency pair is trading above its 20 Hr and 50 Hr moving averages.

For the 24 hours to 23:00 GMT, the USD traded flat against the CAD and closed at 1.3235.

On the data front, Canada's Teranet/National Bank house price index recorded a rise of 2.2% MoM in May. In the prior month, the index had climbed 1.2%.

In the Asian session, at GMT0300, the pair is trading at 1.3244, with the USD trading 0.07% higher against the CAD from yesterday's close.

The pair is expected to find support at 1.3182, and a fall through could take it to the next support level of 1.3121. The pair is expected to find its first resistance at 1.3288, and a rise through could take it to the next resistance level of 1.3333.

Looking ahead, Canada's existing home sales data for May, slated to release later in the day, will be on investors' radar.

The currency pair is trading above its 20 Hr moving average and showing convergence with its 50 Hr moving average.

A note on lower timeframe confirming price action...

Waiting for lower timeframe confirmation is our main tool to confirm strength within higher timeframe zones, and has really been the key to our trading success. It takes a little time to understand the subtle nuances, however, as each trade is never the same, but once you master the rhythm so to speak, you will be saved from countless unnecessary losing trades. The following is a list of what we look for:

• A break/retest of supply or demand dependent on which way you're trading.
• A trendline break/retest.
• Buying/selling tails ... essentially we look for a cluster of very obvious spikes off of lower timeframe support and resistance levels within the higher timeframe zone.
• Candlestick patterns. We tend to only stick with pin bars and engulfing bars as these have proven to be the most effective.

We typically search for lower-timeframe confirmation between the M15 and H1 timeframes, since most of our higher-timeframe areas begin with the H4. Stops are usually placed 1-3 pips beyond confirming structures.

EUR/USD

Following disappointing US inflation and retail sales data on Wednesday, the EUR/USD surged north from the 1.12 handle and topped just ahead of the 1.13 line. It was from this point that we saw the pair give back all of its daily gains as the FOMC decided to increase its benchmark rate by 25bps, consequently bringing price back down to the 1.12 handle going into the closing bell. Despite the gyrations seen during yesterday's segment, the unit, once again, found support off 1.12. With that in mind, much of the following report will echo similar thoughts put forward in Wednesday's analysis…

Directly overhead on the H4 chart we have June's opening level at 1.1238, followed closely by the mid-level resistance at 1.1250. Below 1.12, there's little support seen until price connects with the mid-level barrier at 1.1150.

A quick look at the weekly chart shows that the single currency remains trading around the underside of a major supply at 1.1533-1.1278. Managing to cap upside since May 2015, this is not an area one should overlook. Looking down to the daily timeframe, however, the candles are now seen sandwiched between supply coming in at 1.1327-1.1253 and support pegged at 1.1142.

Our suggestions: Based on the above notes our desk has shown interest around the 1.1150 neighborhood, due to the base converging with the following structures (green area):

• A H4 trendline support etched from the low 1.1075.
• A H4 61.8% Fib support at 1.1159 drawn from the low 1.1074.
• A H4 78.6% retracement level pegged at 1.1149 penciled in from the low 1.1109.
• A daily support level seen at 1.1142.

Seeing as how this zone is rather small, we will not be placing pending buy orders here. Instead, we've chosen to wait for a reasonably sized H4 bull candle to form, preferably a full-bodied candle. This will help prove buyer interest exists here which IS necessary due to where price is trading from on the weekly chart right now.

Data points to consider: US Weekly unemployment claims and the Empire state manufacturing index figures at 1.30pm, US Industrial production and Capacity utilization rate at 2.15pm GMT+1.

Levels to watch/live orders:

• Buys: 1.1150 region ([waiting for a reasonably sized H4 bull candle – preferably a full-bodied candle – to form before pulling the trigger is advised] stop loss: ideally beyond the candle's tail).
• Sells: Flat (stop loss: N/A).

GBP/USD

As expected, the GBP/USD took a similar path to the EUR/USD yesterday. Bouncing higher following dismal US inflation and retail sales data, the pair was able to connect with the 1.28 handle. Of course, this is not your average round number here, since it's positioned nearby weekly resistance pegged at 1.2789.

The pair, as you can see, turned lower from 1.28 and headed back down to the H4 mid-level support 1.2750 into the close, as the Fed, as anticipated, hiked its benchmark rate by 25bps.

If you take a quick look at the daily chart, however, the bulls bounced nicely from 1.2602/1.2698 (a daily zone marked in pink) on Tuesday. Comprised of a support level coming in at 1.2673, a 61.8% Fib support at 1.2625 (taken from the low 1.2365) and an AB=CD (black arrows) 127.2/161.8% ext. completion point seen at 1.2602/1.2698 (drawn from the high 1.3047),making this is a rather attractive buy zone!

Our suggestions: A difference of opinion is currently being seen on the higher timeframes. Judging direction can be tricky in situations like this. Therefore, we'll remain on the sidelines and wait for further developments before making any further decisions.

Data points to consider: UK Retail sales at 9.30am, MPC monetary policy summary at 12pm, BoE Gov. Carney speaks at 9pm. US Weekly unemployment claims and the Empire state manufacturing index figures at 1.30pm, US Industrial production and Capacity utilization rate at 2.15pm GMT+1.

Levels to watch/live orders:

• Buys: Flat (stop loss: N/A).
• Sells: Flat (stop loss: N/A).

AUD/USD

April's opening level at 0.7632 elbowed its way into the spotlight yesterday, following lower-than-expected US inflation and retail sales data. Thanks largely to the Fed increasing its benchmark rate by 25bps, 0.7632 held steady, forcing the commodity currency back below the 0.76 handle, and into a H4 support area at 0.7571-0.7557 by the day's end.

Wednesday's advance also saw weekly action pierce above supply coming in at 0.7610-0.7543, likely filling a huge amount of buy stops in the process. Looking down to the daily candles, nonetheless, the candle managed to hold below the 61.8% Fib resistance at 0.7588 taken from the high 0.7747, despite chalking in an aggressive whipsaw wick that almost tagged the underside of supply seen at 0.7679-0.7640. Traders may have also noticed that directly below the Fib level sits a daily support area coming in at 0.7556-0.7523.

Our suggestions: Given the H4 candles are now sandwiched between the aforementioned H4 support area and the 0.76 handle, movement is somewhat restricted for the time being. In addition to this, we're not too impressed with the structure seen on the higher timeframes at the moment. This – coupled with Aussie employment figures scheduled to be released in the next hour, we will humbly take a back seat today and look to reassess the market going into tomorrow's open.

Data points to consider: Australian employment change at 2.30am, RBA Assist Gov. Debelle speaks at 8.40am. US Weekly unemployment claims and the Empire state manufacturing index figures at 1.30pm, US Industrial production and Capacity utilization rate at 2.15pm GMT+1.

Levels to watch/live orders:

• Buys: Flat (stop loss: N/A).
• Sells: Flat (stop loss: N/A).

USD/JPY

The USD/JPY suffered a blow to mid-section yesterday after below par US inflation and retail sales data hit the wire. Pushing through both the 110 handle and also the H4 mid-level support at 109.50, the pair shook hands with the 109 handle as we entered the US segment. The Fed, as expected, lifted the benchmark interest rate by 25bps, confirming support around 109 and pushing price back above the 109.50 barrier by the close.

Weekly bears continue to remain in a relatively strong position after pushing aggressively lower from supply registered at 115.50-113.85. We know there's a fair bit of ground to cover here, but this move could possibly result in further downside taking shape in the form of a weekly AB=CD correction (see black arrows) that terminates within a weekly support area marked at 105.19-107.54 (stretches all the way back to early 2014). In conjunction with weekly flow, daily price also shows a potential AB=CD correction in the works taken from the high 114.36, which could see price drive lower to 107.15-107.90: a support zone that's glued to the top edge of the said weekly support area and holds a 61.8% Fib support at 107.81 taken from the low 101.19.

Our suggestions: In light of the above notes, our team has no interest in buying this market today. Instead, what we're looking for is a H4 close to print below 109.50. That way, we'd not only have space to sell down to at least 109, but we'd also be trading in line with higher-timeframe flow.

Data points to consider: US Weekly unemployment claims and the Empire state manufacturing index figures at 1.30pm, US Industrial production and Capacity utilization rate at 2.15pm GMT+1.

Levels to watch/live orders:

• Buys: Flat (stop loss: N/A).
• Sells: Watch for H4 price to engulf 109.50 and then look to trade any retest seen thereafter ([waiting for a lower-timeframe sell signal to form following the retest – see the top of this report – is advised] stop loss: dependent on where one confirms this level).

USD/CAD

The USD/CAD erased some of its earlier losses (spurned on by lower-than-expected US inflation and retail sales data) after the Fed stepped in and lifted its benchmark interest rate by 25bps. This allowed the pair to trade back above the 1.32 handle and retest H4 resistance at 1.3263.

Despite the minor whipsaw seen through the lower edge of the weekly demand base at 1.3223-1.3395, the area remains in play. A closer look at price action on the daily chart, nevertheless, shows price is capped between support drawn from 1.3212 and resistance at 1.3272, which happens to converge with a trendline resistance extended from the low 1.2968.

Our suggestions: Given the uncertainty surrounding the weekly demand area, and daily price not showing much in the way of direction at the moment, looking to sell from the current H4 resistance is not something we'd consider high probability. As such, remaining flat until more conducive price action presents itself is the route we've chosen to take.

Data points to consider: US Weekly unemployment claims and the Empire state manufacturing index figures at 1.30pm, US Industrial production and Capacity utilization rate at 2.15pm. Canadian Manufacturing sales at 1.30pm GMT+1.

Levels to watch/live orders:

• Buys: Flat (Stop loss: N/A).
• Sells: Flat (Stop loss: N/A).

USD/CHF

Using a top-down approach this morning, we can see that the bulls continue to show promise after connecting with the weekly Quasimodo support level seen at 0.9639. To our way of seeing things, the next upside target on this scale does not come into view until weekly resistance located at 0.9861. It's much the same story on the daily chart, except the next upside hurdle is seen around supply coming in at 0.9825-0.9786.

Swinging over to the H4 chart, the US dollar turned to the upside yesterday following the Fed's decision to raise interest rates by a further 25bps. Running through offers around the 0.97 handle, the pair was able to connect with a H4 61.8% Fib resistance plugged at 0.9732.

Our suggestions: In light of the higher-timeframe picture, our desk is biased to the upside. Be that as it may, buying this market is a little challenging. Not only is there the aforementioned H4 61.8% Fib resistance lurking just ahead, but a few pips above that sits the H4 mid-level resistance at 0.9750 that merges with a H4 trendline resistance taken from the low 0.9691. Therefore, we're afraid that we have no interest in trading this market today.

Data points to consider: US Weekly unemployment claims and the Empire state manufacturing index figures at 1.30pm, US Industrial production and Capacity utilization rate at 2.15pm. SNB Monetary policy assessment at 8.30am GMT+1.

Levels to watch/live orders:

• Buys: Flat (stop loss: N/A).
• Sells: Flat (stop loss: N/A).

DOW 30

Although US equities pushed to a fresh record high of 21388 yesterday, the market took on more of a sober tone in comparison to Wednesday's trading. For those who have been following our reports over the past few days you may recall that our desk had recently taken a small long position at 21164 and placed stops below the H4 support area (21139-21101) at 21097. The position is still active, but we have liquidated 50% of the trade around the 21234 neighborhood.

Fortunately, the index continues to push higher as we are now looking to trail this market with the remainder of our position. The stop remains located below Monday's session low (21192) at 21188. Ideally, we're looking for H4 price to remain above the H4 support level coming in at 21268, as a close below here could imply that our stop-loss order is at risk of being filled.

Our suggestions: Should H4 action pullback and retest 21268 and hold as support, our team may, dependent on the time of day, consider adding to our position. A H4 bullish candle (preferably a full-bodied candle) would be a fantastic sight as this would be enough evidence to trigger an additional buy in this market.

Data points to consider: US Weekly unemployment claims and the Empire state manufacturing index figures at 1.30pm, US Industrial production and Capacity utilization rate at 2.15pm GMT+1.

Levels to watch/live orders:

• Buys: 21164 ([live] stop loss: 21188). 21268 region ([waiting for a reasonably sized H4 bull candle – preferably a full-bodied candle – to form before pulling the trigger is advised] stop loss: ideally beyond the candle's tail).
• Sells: Flat (stop loss: N/A).

GOLD

As can be seen from the weekly timeframe, the bears continue to hold this market lower after connecting with an area comprised of two weekly Fibonacci extensions 161.8/127.2% at 1313.7/1285.2 taken from the low 1188.1 (green zone). From this scale, there's room for the precious metal to continue pumping lower until we reach the demand base coming in at 1194.8-1229.1.

Sliding down to the daily timeframe, bullion is seen trading within an ascending channel (1180.4/1263.7). The demand area coming in at 1247.7-1258.8 continues to hold firm. Pressure from weekly sellers could see this area consumed, however, which in turn would likely bring the candles down to the channel support taken from the low 1180.4.

Turning our attention to the H4 timeframe, support at 1259.1 remains intact, despite the whipsaw to lows of 1257.0. With this support level seen capping downside, and May/June's opening levels at 1270.5/1269.0 seen capping upside, where does one go from here?

Our suggestions: It's never ideal when the higher-timeframe picture shows conflicting signals. Of course, one could still look to trade from the above said H4 levels, but not knowing where the higher timeframes are likely headed, one should not really expect much more than a bounce. For us personally, we're going to take the side of caution and remain on the sidelines for the time being.

Levels to watch/live orders:

• Buys: Flat (stop loss: N/A).
• Sells: Flat (stop loss: N/A).

Short term GBPJPY Elliott Wave view suggests the decline from 5/10 high shows a 5 swing sequence, thus favoring more downside. Decline from 5/10 high is unfolding as a double three Elliott Wave structure. Down from 5/10 peak (148.11), Minor wave W ended at 141.47 and Minor wave X ended at 143.96. Minor wave Y is currently in progress and has scope to retest 4/16 low (135.58). Support can be seen at 135.7 – 137.3 area for at least 3 waves bounce.

Subdivision of Minor wave Y is proposed to be unfolding as a triple three Elliott Wave structure. Down from 6/1 peak (143.96), Minute wave ((w)) ended at 140.68, Minute wave ((x)) ended at 142.77, Minute wave ((y)) ended at 139.52 and Minute second wave ((x)) is proposed complete at 140.9. While near term bounce stays below 142.75, and more importantly below 143.95, expect pair to extend lower. We don’t like buying the pair.

GBPJPY 1 Hour Elliott Wave Chart

Global Markets:

• Asian stock markets: Nikkei down 0.40 %, Shanghai Composite lost 0.05 %, Hang Seng declined 0.90 %, ASX 200 fell 1.10 %
• Commodities: Gold at $1267 (-0.70 %), Silver at $16.95 (-1.10 %), WTI Oil at $44.50 (-0.10 %), Brent Oil at $47.00 (+0.05 %)
• Rates: US 10-year yield at 2.13, UK 10-year yield at 0.93, German 10-year yield at 0.23

News & Data

• Australia Employment Change 42k vs 10k expected
• Australia Unemployment Rate 5.5 % vs 5.7 % expected
• Australia Participation Rate 64.9 % vs 64.8 % expected
• Australia MI Inflation Expectations 3.6 % vs 4.0 % previous
• New Zealand GDP q/q 0.5 % vs 0.7 % expected
• New Zealand GDP y/y 2.5 % vs 2.7 % expected
• Global stocks pressured by report on Trump probe, Fed hike, soft U.S. data – RTRS
• Fed raises rates, unveils balance sheet cuts in sign of confidence – RTRS
• U.S. consumer prices, retail sales weaken in May – RTRS

Markets Update:

The Federal Reserve raised rates yesterday, as expected by the market. The statement and projections were slightly more hawkish though, with the central bank saying that the recent weakness in inflation is largely transitory. The US Dollar came under pressure ahead of the FOMC, due to soft inflation and retail sales numbers, but recovered after the announcement.

The Australian Dollar rallied overnight, after stronger than expected employment data. AUD/USD rose from 0.7585 to a high of 0.7630. The pair eventually lost momentum, as resistance around 0.7630 proved again to be tough. However, the outlook is positive and intraday support is now seen at 0.7570 and 0.7520.

The New Zealand Dollar had a weak performance after NZ GDP data missed expectations. NZD/USD fell from 0.7310 to 0.7230 overnight. A break below 0.72 support could signal a pullback towards 0.7120 support.

Price action in the other major pairs was unusually quiet. The Euro is again consolidating around 1.12, while USD/JPY is struggling to get back to 110.

Today, both the Swiss National Bank and the Bank of England will decide on interest rates. No changes are expected, but the BoE meeting could be more interesting as inflation continues to rise in the UK.

Upcoming Events:

• 07:45 BST – French CPI
• 08:15 BST – Swiss CPI
• 08:30 BST – SNB Rate Decision
• 08:30 BST – SNB Press Conference
• 09:00 BST – Italian CPI
• 09:30 BST – UK Retail Sales
• 10:00 BST – Euro Zone Trade Balance
• 12:00 BST – Bank of England Rate Decision
• 12:00 BST – Bank of England Meeting Minutes
• 13:30 BST – US Philadelphia Fed Manufacturing Index
• 14:15 BST – US Industrial Production
• 14:15 BST – US Manufacturing Production
• 15:00 BST – US NAHB Housing Market Index

STOCKS

Dow (21374.56, +0.22%) has been moving in line with our expectation as mentioned yesterday and could head towards our target of 21600 in the next 3-4 sessions.

Dax (12805.95, +0.32%) made an intra-day high of 12798 yesterday but came off sharply from there. Note that 13000 is a crucial near term resistance which if holds could push back the index towards 12400 again. Only on a confirmed break above 13000 could we become more bullish on Dax.

Shanghai (3132.56, +0.06%) closed near 3130 in line with what we had mentioned yesterday. A bounce back towards 3170 is on the cards for the near term.

Nikkei (19797.46, -0.43%) has bounced from immediate support near 19755 and while that holds, the index could rise back towards 20100 in the near term.

Nifty (9618.15, +0.12%) also came down to almost support levels near 9570 before again bouncing back to levels above 9600. While 9570-9550 holds, there is still scope for a sharp bounce towards 9700.

COMMODITIES

Muted price action had been seen in Gold (1267), as it remains in a slow corrective move which may take it to the support of 1242 but if the support holds, a quick bounce towards 1307 can’t be ruled out. Silver (16.97) is also hovering around its resistance of 16.95. A close above that could open up 17.60 as well.

Copper (2.57) is trading within the narrow range of 2.56-2.68. Only above 2.68, higher resistances of 2.84 can come into consideration. We will remain bullish on copper while it is trading above 2.55 regions on a closing basis.

On 10th of March, 2017, we had written in MB that 'Immediate support for Brent is at 45.42 and WTI at 44. We would not be surprised if we will see these levels within a few weeks of time” and those levels have almost come. At the same we had also warned yesterday that irrespective of oversold condition, a less than expected negative inventory (actual -1.7 vs. expected -2.3) could bring the bearish possibility again into consideration and the same had also happened. Now, considering the short term oversold sate, we may see some profit taking rally in Brent (47.02) and WTI (44.70) towards their respective resistances of 51.25 for Brent and 47 for WTI respectively. But the trend is still bearish in the medium term time frame. Any corrective bounce may face extreme selling pressure at the higher levels and could open up lower levels like 42 and 42.60 for both Brent and WTI respectively.

FOREX

The Fed hiked the rates as expected and laid out plans to trim the $4.5 trillion balance sheet. Dollar weakened briefly but the bullish reversal chances remain open.

Contrary to expectations, Dollar Index (96.94) made a fresh low at 96.32 before bouncing back near 97.00 but the technical picture hasn’t changed much as the upside reversal chances remain open but requires a break above 97.20-30 to confirm it.

Euro (1.1218) invalidated our Triangle pattern and registered a fresh high at 1.1296 but the stiff rejection at the higher levels imply inherent weakness which would be confirmed on a break below 1.1160.

Dollar-Yen (109.55) was rejected exactly from our resistance of 110.35 to a fresh low at 108.80 but the sharp recovery suggests that the Dollar bulls are still at play. The downside looks limited to 108.00 but a break above 110.35 may take it to 111.00 initially above which comes 113.00.

Pound (1.2740) briefly tested the major resistance 1.2800 but the failure to sustain the higher levels keeps the trend weak. Immediate support comes at 1.2600.

Aussie (0.7602), contrary to expectations, surged above 0.7600 on the back of much better than expected employment data (+42k against expectations of +10k in May). It is not clear at the moment if it will be able to test the higher resistance of 0.7700-50 levels without a correction and we prefer to wait for 1-2 sessions for clarity. Trend remains up with immediate support coming at 0.7550-20.

Dollar-Rupee (64.30) is trading at 64.30 in the NDF right now, totally indifferent to the Fed policy. It remains to be seen if the ECB meet today can move it. Repeat - the support of 64.30-20 is expected to hold and push it back to 64.60-80.

INTEREST RATES

The US yields moved lower and entered into the oversold territory. The 10Yr (2.13%) is trading at its crucial support and could bounce from these levels. The 30YR (2.77%) is also hovering around its crucial support of 2.79 and a close above that could open up 2.88 and 2.94 levels respectively .

The Japan-US 10YR (2.08%) is trying to break below immediate support levels and in case it falls sharply, could pull down Dollar-Yen with itself in the coming sessions. .

The German-US 10Yr (-1.91%) and the German-US 2YR (-2.06%) have bounced from immediate support levels and are heading towards medium term resistances which if holds, could again push off the yield spreads to lower levels. Euro could move up or remain stable in the next couple of sessions before falling off to lower levels.

Today, the FOMC raised the fed funds target rate and will make further adjustments depending on the path of incoming data. This policy path is consistent with past guidance, but we are skeptical about what lies ahead.

Future Expected Inflation Dominates Current Inflation

The FOMC raised its target for the federal funds rate by one-quarter percentage point and made some slight adjustments to its interest rate forecast going forward. The minimal changes to the Fed's dot plot projections were also reflected in the economic forecasts. Real GDP growth was left essentially unchanged throughout the forecast horizon. The projection for the core PCE deflator was lowered for both 2017 and 2018 by 0.1 percentage point. Inflation, as measured by the PCE deflator, is expected to gradually rise but remain below the 2 percent target (top chart). The FOMC's full employment target has been more or less met.

From the FOMC's point of view, the model matters more than current inflation numbers. Based upon a low unemployment rate relative to expectations for full employment, future inflation should be rising as this model projects expected inflation toward the Fed's two percent goal.

Have Model Then Generate Dot-Plot

Given the model's projection of higher inflation, the FOMC projects one more rate hike in 2017, which also remains our forecast. However, this is highly dependent on a move upward in inflation. If inflation does not pick up, we expect no move in September. The dots showed 2018 and longerrun projections unchanged (middle chart).

The Fed's longer-run median projection for the neutral fed funds rate is three percent; with a two percent inflation target, the real long-run fed funds rate is implicitly one percent. Such a low real funds rate indicates something about potential growth inconsistent with the goals of the current presidential administration.

The Fed's Balance Sheet: Some Guidance, but Questions Remain

This afternoon's release was accompanied by an addendum providing additional details regarding the Fed's plans to normalize its balance sheet. The Fed stopped short of setting a specific time at which normalization would commence, only saying that they expected to begin implementing the program "this year." The Fed also refrained from setting a target end date/balance sheet size that would mark the end of normalization. The Fed did, however, confirm that it will implement normalization by decreasing its reinvestments of principal payments on maturing securities.

Specifically, the Fed will set a "cap" on the dollar amount of principal payments it will not reinvest, with all payments above this cap reinvested. The Fed anticipates that the cap will initially be $6 billion per month for Treasury securities and $4 billion per month for agency debt and mortgagebacked securities. The caps will then increase in steps of $6 billion and $4 billion, respectively, at three month intervals over a 12 month period until the caps reach $30 billion and $20 billion, respectively. On balance, this would be a relatively modest and gradual first step in reducing the Fed's sizable $4.5 trillion balance sheet.

As widely expected, the Federal Open Market Committee (FOMC) raised the target range for the federal funds rate by 25 basis points to between 1 and 1-1/4 percent.

The Committee also expects to begin normalizing the balance sheet later this year, having outlined a plan to gradually reduce its holdings by tapering reinvestments in its Treasury and MBS portfolio. The Fed expects to cap runoff at $10 billion per month initially ($6bn for UST/$4bn for MBS) before raising it to $50bn per month within a year with the same 60/40 split between UST and MBS.

The Committee was somewhat sanguine on the economy, indicating that activity has been "rising moderately" while the labor market "continued to strengthen" as job gains "moderated but have been solid" and unemployment declined. The statement highlighted consumer spending has accelerated recently, while business investment continued to expand. Inflation was viewed as having "declined recently" while the core measure is running "somewhat below 2 percent," but expected to stabilize near the target over the medium-term. At the same time, inflation expectations were viewed as little-changed and still low.

The Summary of Economic Projections saw the Committee lower its unemployment forecasts by 0.2 to 0.3 percentage points through 2019, anticipating the jobless rate to average 4.3% this year and 4.2% over the subsequent two years, with the Committee's view of unemployment over the longer-term 0.1pp lower at 4.6%. At the same time, the FOMC revised its near-term inflation outlook, lowering its 2017 average for PCE and core PCE deflator by 0.3 and 0.2pp, respectively, given the weaker data to date. GDP projections were slightly higher at 2.2% for this year (from 2.1% as of March SEP), but remained unchanged for 2018 and 2019, at 2.1 and 1.9%, respectively.

The SEP interest rate projections were largely unchanged, with the median dot still suggesting one more hike later this year, with three apiece next year and in 2019. The median projection for the equilibrium rate hasn't changed, but the range has tightened to between 2.5% to 3.5%.

There was one dissenter with Kashkari (FRB Minneapolis) voting against the remaining Committee members, given his preference to keep the rate unchanged.

Key Implications

This statement was largely as expected, with the Fed emphasizing the continued labor market improvement and accelerating economic growth as reasons to be optimistic for the economic and inflationary outlook. As such, the Fed appears unfazed by the recent inflationary slowdown, viewing it as temporary despite another weak CPI print this morning. Echoing that view was the SEP, which lowered near-term inflation projections, but left the forecasts for the coming years unchanged.

Given the lower inflation projections it was somewhat surprising that the dots were little changed, suggesting another rate hike and the beginning of the normalization process later this year. The Fed did lower its view of the natural rate of unemployment, albeit slightly, suggesting that the Committee is chalking up some of the current inflation misses to what appears to be a lower than previously believed unemployment rate gap.

At this point, we expect the Fed to pay very close to inflation numbers going forward. Should the low unemployment begin to generate the anticipated wage and inflation gains, another rate hike is very much a possibility later this year, as is the start of balance sheet normalization. However, should inflation continue missing, we would expect the Fed to pare back its rhetoric and likely further lower its projections for the natural rate of unemployment.