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Fed Warns on Inflation

FOMC Leaves Interest Rates on Hold With Concerns Raised About the Outlook

inflation

The Federal Reserve unanimously chose to leave the benchmark interest rate unchanged as was widely expected however the outlook for inflation is giving cause for concern that the Central Bank will postpone a rate hike in September as the weakness in energy prices exacerbates weakness in consumer prices.

Fed Policy Left Unchanged

Marking 54-straight meetings without a single interest rate hike, yesterday’s FOMC Statement and interest rate decision were no surprise to most market participants as the Federal Reserve maintained much of the same language on the economy.  According to the statement, slack in the labour market has continued to diminish with the economy posting solid job gains as the Fed setting the stage for liftoff when the employment picture improves further. While some have interpreted the language as a sign that the Federal Reserve might opt to push back the timeline for rate hikes, the true sign that the shift in monetary policy might not be coming sooner was the lack of language in relation to the inflationary outlook as energy prices once again drag on CPI and PCE inflation metrics. The dollar was steadier on the announcement, making strides higher against all peers after softening earlier in the week.

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Japanese Industrial Production Surges

After several disappointing readings, Japanese industrial production climbed back into positive territory with the preliminary month over month figure showing an expansion of 0.80% in June. Annualized expansion currently stands at 0.20% according to the latest numbers, highlighting the benefits of the weaker Yen when it comes to stimulating the export economy. Nevertheless, the economy continues to face headwinds as investor confidence continues to plummet. Japan currently boasts a higher government debt-to-GDP ratio than Greece, contributing to the negativity in sentiment. Foreign investors continue to abandon Japanese assets as evidenced by the JPY -82.1 billion in outflows from the stock market recorded in the latest reporting period. Despite waning optimism, the Nikkei 225 has rallied 1.08% while the USDJPY pair is once again on the rise, approaching multi-year highs on the back of a stronger dollar.

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Crude Oil Inventories Tumble

Prices of the West Texas Intermediate and Brent crude oil benchmarks rose substantially yesterday after reports of a larger than expected inventory drawdown according to the US Department of Energy. Stockpiles fell by -4.203 million barrels last week, more than the -0.184 million forecast after rising by 2.468 million barrels in the prior week. Moreover, US production had the biggest dip since 2013 with output tumbling by over 1.50% last week as the war against American shale production picks up pace. However, even though oil prices experienced a marked uptick in trading yesterday, the latest International Energy Agency outlook shows that 2016 demand is forecast to slow meaning that current production levels could contribute to a continued supply glut that forces prices lower. The spread between Brent and WTI continues to shrink this week, now trending under $5 as concerns about the outlook intensify.

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GBPUSD Ascending Triangle Technical Pattern

In spite of the strength experienced in the US dollar following the FOMC decision and statement, the UK Pound continues to make strides as accelerated growth momentum and the outlook for interest rates indicate the Bank of England rapidly approaching its own interest rates hike. The dollar uptick dragged the GBPUSD pair lower which is currently consolidating between resistance at 1.5673 and a near-term uptrend, forming an ascending triangle formation with a bullish bias. Any move above the critical resistance level would be indicative of a triangle-based breakout to the upside accompanied by increased momentum and volume. However, should GBPUSD make a move below the current uptrend line, it could suggest a breakdown in the pattern and possible downside reversal in the pair.

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