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Moment of Truth

by Sean Coakley | December 14, 2016

– Equities & Dollar Ebb Ahead Of Fed

– Fed Rate Hike Policy On Deck

– Equity Market Signals Overbought Conditions

 

With over a month of Trump inspired exuberance behind us, risk-weighted assets along with the US dollar have taken a bit of a breather ahead of today’s Fed announcement as the market awaits news to confirm if the party can continue. With expectations of a rate hike today set at 100% the true value of today’s announcement is the determination of the likely trajectory of future rate rises and what that would mean for the US dollar as the rest of the world remains in the mire of low inflation and low rates.

Asian trading saw an ebb in US dollar strength with the buck losing steam and giving up ground against the yen, markets across Asia were also mixed as the same wait and see mood gripped traders there as well. Despite a consumer confidence report that came in worse than expected the Australian dollar along with its Kiwi counterpart both moved higher as the improved risk sentiment of the last few weeks has found favour with commodity producers.

Europe is much the same story of muted volumes ahead of the Fed, despite that the pound saw a pop as the British economy put in another round of favourable employment and wage data, obviously causing celebration amongst the Brexit camp. The euro was not so fortunate, coming down a few ticks versus both the greenback and the pound as a miss on industrial production figures soured trader’s moods.

Ahead of market open stateside, futures are indicating a positive open for equity markets. Relative strength indicators covering equity markets have begun to signal overbought conditions in the market. This is not surprising as much of the price action in the markets has been based entirely on the assumption that the Trump administration results in a regime change to a more pro-business environment. Given the inconsistency of Trump’s messaging and growing political controversy around him it looks increasingly likely that this hope may be misplaced, with obvious implications for all asset classes including FX if we see a sudden reversal. Either way, today’s Fed announcement will serve as an important touchstone for traders to refine their investment thesis heading into 2017, should traders prove to be as fickle as Trump we are in for a bumpy ride.

 

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