Hawkish Fed shores up Dollar as inflation slide seen temporary

FX:XAUUSD   Gold Spot / U.S. Dollar
The Federal Reserve left interest rate unchanged at the meeting on Wednesday, but surprisingly saw December hike appropriate despite persisting slack on inflation front.

As expected, the Fed set a green light to balance sheet cut, amounted 4.2 trillion. dollars, most of which has been amassed after the 2008 mortgage crisis. According to new economic forecasts, 11 out of 16 polled officials suddenly nodded for another small rate hike by the end of this year. The chances for the Fed shift in December rose sharply to 70.5% according to the CME .

In the Fed statement, a surprise for the markets was a satisfactory assessment of the dynamics of the labor market, inflation and business investment. Durability of growth was highlighted as sufficient condition for keeping up with policy normalization while matching with the forecasts appeared to be not so crucial for the policymakers. The head of Federal Reserve Janet Yellen questioned the recent lull in inflation as evidence of the economy slack, saying that this issue needs additional research. Short-term risks in the opinion of the regulator remained “roughly balanced", but the conclusions for reasons of inflation slowdown can significantly change the course of policy, the head of the regulator said.

Although the main attention of investors was focused on the fate of the December rate hike, long-term change in the regulator’s goals towards downgrade was also important for the markets. Long-term rate, the end target of policy normalization, was reduced to 2.75%, although before the 2008 crisis, Federal Reserve considered the borrowing rate as comfortable for the economy at 5.0%. Now, the long-term yield curve looks even more appealing, potentially giving a signal for continued growth in the debt and equity markets, as soft credit conditions in the economy will favor an investment outflow from the money market to corporate debt and emerging markets with high interest rates, for example, Russia. Therefore, the reaction of USDRUB pair to the bullish ending of the year in the US has become less noticeable, since it is clear that mixed signals have arrived.The dollar index returned to the level of 92.00, the main opponents of the dollar responded with an abrupt fall, but the momentum quickly died down and Thursday passes quite calmly for the foreign exchange market. The decision of the Fed revealed overbought gold , both due to unstable geopolitics, as well as underestimation of the chances of a third rate hike. The asset collapsed by $15 and continues to struggle for the $ 1,300 level while remaining in search of fundamental factors for maintaining positions.

Draghi's public appearances this week.

For European investors closely watching the actions of the ECB, the end of the week can become very saturated. President Mario Draghi will appear three times in public on Thursday and next week, while his ECB colleagues will also perform at various events throughout Europe. Speeches are not about monetary policy , but officials can use them to adjust market sentiment before the ECB meeting in October. According to Draghi's statements in September, the next meeting will be very productive embracing several policy decisions economic forecasts and guidance on the future policy.

Oil market

A strong dollar held back the rise in oil prices, while the EIA report was ignored for a second consecutive week by the market due to imbalances in consumption and supplies in the US market, hazing rebalance prospects.

The EIA report showed that gasoline stocks fell for the third week in a row to a minimum since November 2015, the value of stocks of distillates due to increased demand has fallen to the lowest since 2011. The positive aspects of the report were offset by the growth of oil reserves by 4.6M barrels, 700K barrels higher than were anticipated.

Arthur Idiatulin

This analysis is provided as general market commentary and does not constitute investment advice.