Post FOMC Stunner

Daily Analysis - 19/03/2015

FOMC Statement and Press Conference Sends Volatility Surging

The Federal Open Market Committee largely confirmed market expectations, sending commodities, stocks, and bonds higher while the dollar sold off. This latest statement added more uncertainty to markets already cautious about the outlook as the Federal Reserve tempered forecasts for GDP and inflation.

Dollar Flash Crashes

Yesterday’s FOMC Statement proved a major turning point for investors as the Federal Reserve provided more hints about the timeline for an interest rate hike. Although Fed Chairwoman Janet Yellen did not completely reject raising rates at the next meeting, she dismissed the timing as improbable, leaving traders to anticipate a more hawkish Federal Reserve in either June or September. While the Fed plans to remain “data dependent” in its decision-making, the latest revisions lower in growth and inflation expectations should not be ignored. Since the last forecasts were published in December, growth expectations for 2015 have moderated to 2.30%-2.70%. The commentary sent the US dollar tumbling versus peers before experiencing a flash crash after the close of the American equity session. The crash generated the greatest volatility in currencies since the Swiss decision with EURUSD swelling over 400 pips.

Commodities Soar

The broad weakness in the US dollar saw commodities higher across the board despite lower growth and inflation projections released by the Federal Reserve. The inverse correlation between the dollar and dollar-based commodities remains strong despite recent data that implies a protracted recession is sweeping through the global economy. Gold prices rose spectacularly, moving well off of lows below $1150 before hitting upside resistance sitting firmly at $1180 per troy ounce. As the dollar rebounds from lows, expect further pressure on precious metals to underperform. WTI crude oil gained as much as $2.77, or over 5% before retracing half the move to the downside as inventory data weighed on the outlook. EIA data released yesterday crushed estimates, showing a 9.622 million barrel build in inventories versus expectations of a 3.750 million addition. Storage capacity limits might be reached well before June if the present pace of oil output endures.

Equities Gain

Comments from Janet Yellen on equity valuations proved not enough to take the fire out of benchmark indices which rose across the board yesterday. She noted during the question and answer session that “overall measures of equity valuations are on the high side,” implying that the equity markets have gotten slightly ahead of themselves. Yellen surprisingly refused to comment on specific sectors like biotechnology and social media which have seen astronomical valuations expand even further despite warnings from several prominent investors. The losses in the dollar translated to cheaper equity benchmarks which led to a surge in bidding. Stocks shrugged off Yellen’s comments with the Dow Jones Industrial Average adding 1.27% followed by a 1.22% gain in the S&P 500. The Nasdaq Composite lagged behind peers, increasing a more modest 0.92%.

EURGBP Equidistant Channel Technical Pattern

The Euro has rebounded dramatically against the dollar since bottoming out earlier in the week, helped in part by the weakness in the dollar. With the UK pound stronger versus the dollar following the dollar flash crash, concerns still remain abundant regarding the UK outlook despite the Government seeking to move away from austerity driven policies to pro-growth programs. Greece is likely to prove the main driver of price momentum in the EURGBP pair in the short-term. The upward trending equidistant channel setting up in the pair for the last week has a bullish bias with optimal positioning following the trend. Long positions from the lower channel line to be closed at the upper channel line provide optimal reward characteristics.