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FOMC Statement Cuts Guidance

Calendar Guidance for Potential Interest Rate Hikes Notably Absent From Latest Policy Statement

gloomy-american-economy_03102015-2

Yesterday’s FOMC Statement left markets begging for more information after the Open Market Committee dropped the calendar guidance for possible interest rate hikes, despite the softness in the first quarter GDP results. Citing the relatively stable employment and gains in household income, the Federal Reserve is still preparing for higher rates even if the growth outlook does not support the view.

Fed Drops Hawkish Hints

First quarter preliminary US GDP figures disappointed expectations by a wide margin, printing at a meager 0.20% growth versus expectations of 1.00%. Although there is a strong propensity for the number to be revised in the subsequent readings, it was nearly in-line with the Atlanta Federal Reserve model which forecast a 0.10% increase. Moreover, the main event of the session was the FOMC Statement which saw a more hawkish pivot than previous meetings. The Federal Reserve moved to drop the specific guidance on timing rate increases in a move that might signal they are not going to warn markets of coming rate hikes in subsequent quarters. The statement also highlighted that the Federal Reserve remained unconcerned about slowing growth, blaming the weakness on weather even with the headwinds to household spending. The kneejerk reaction in financial markets was a modest rebound in the dollar with precious metals selling-off and equities largely unchanged.

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eurusd04302015

Bank of Japan Maintains Stimulus

Contrary to expectations of an imminent expansion to the Bank of Japan’s quantitative easing program, investors were surprised to learn that no plans were underway to broaden monetary policy measures. This comes on the heels of reduced inflation expectations, a far cry from the 2.00% targeted by the Central Bank as forward guidance on GDP is reduced in the wake of stagnant stimulus measures. Voting members overwhelmingly voted against increasing stimulus, with only one dissenting vote wanting to ease policy further. Similar to the European Central Bank, the Bank of Japan is betting on a rebound in inflation in order to not have to enlarge the size of the existing stimulus measures. The resulting move was felt across Japanese assets, with the Nikkei 225 experiencing a 500 point drop from intraday highs and USDJPY tumbling 50 pips before recovering about 60% of the losses.

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usdjpy04302015

Saudi King Consolidates Power

In a surprising move, Saudi King Salman reshuffled his cabinet, paving the way for younger princes to play a more prominent role in the Gulf’s largest oil producing region. The latest move, likely aimed at moving his family closer to the circle of power, is intended to shift the image of the nation which has been known for having appointed older generations to senior positions within the government. While succession plans for the throne are changing, the Saudi’s prevailing energy policy was not impacted by the modifications. Furthermore, Saudi Arabia is becoming increasingly aggressive in its tactics to win more market share in Asia, highlighting the stability and reliability of the nation’s supply. Oil prices continue to rise despite the modest gains in the dollar, with WTI rising $2.75 points off yesterday’s lows despite 16-straight weeks of inventory gains in the United States according to the latest EIA data.

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NZDUSD Ascending Triangle Pattern

The Reserve Bank of New Zealand moved to keep monetary policy unchanged overnight, leaving the benchmark interest rate at 3.50%. The New Zealand dollar plunged against the US dollar as the RBNZ cautioned that the Central Bank is considering cutting interest rates should inflation begin to fall short of targets. The lack of consideration of higher rates means that the longer-term risks are to the downside for the pair despite the near-term possibility of further appreciation. The NZDUSD currency pair is currently setting up for an ascending triangle breakout on the upside with resistance at 0.7740. The near-term uptrend intact since bouncing from March lows continues to form the lower bound for the current consolidation. Any break above the key resistance level will likely see increased momentum towards 0.7825 and 0.7927. A move below the uptrend line could signal the beginning of a reversal lower.

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