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Stage Set for September

FOMC Confirms 2015 Liftoff for Interest Rates

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Anticipation is high that September will mark the first Federal Reserve rate hike in almost 10-years with plans for an additional increase during the calendar year. The more hawkish Fed tone comes at a time when economic data remains somewhat skittish and not necessarily indicative of a recovery.

Fed Proposes Hike

The Federal Reserve confirmed its more hawkish attitude in yesterday’s FOMC Statement which anticipated two 25 basis point increases to the benchmark interest rate in 2015. The Fed was quick to cite improvements in the labor market and moderate economic expansion as part of the case for higher rates. Although no specific date was set for the liftoff, traders are anticipating that September will mark the first action towards normalizing interest rate policies. More important than when the interest rates rise, is the path of rates according to Fed Chair Janet Yellen. However, several factors are holding back optimism, namely weaker inflation. Should numbers released later today show a rebound in consumer prices that might strengthen the argument for higher interest rates. The policy shift is likely to cause substantial volatility as evidenced by the dramatic rally and subsequent reversal in equities following the announcement.

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Greece Prepares for Capital Controls

Protests have returned to Greece as the Government awaits answers from creditors while the Euro Area members continue to plan for contingencies including capital controls and bank holidays akin to what was witnessed in Cyprus several years back. The Syriza-led Government is unwilling to negotiate on the points of pensions and VAT meaning that negotiations have likely hit a dead end with creditors pulling any remaining support for the country. Popular sentiment is turning against Europe and while an exit and leaving the Euro is not necessarily a popular idea yet, if a disorderly default occurs, the amount of social unrest could quickly topple the government if it accelerates. Nevertheless, the Government is standing firm and the vitriolic rhetoric emanating from Athens asserts that the debt load is illegal and “odious” and thereby does not need to be repaid.  Creditors will likely choose to disagree with that sentiment.

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Bitcoin Surges on Exit Fears

One of the knock-on effects of the uncertainty in Greece has been heightened awareness of non-fiat currencies such as digital currency bitcoin. Prices of the digital currency rallied substantially yesterday and although prices have since retreated modestly, Greeks looking for an alternative currency and investors seeking options to hedge against the risks of governments are increasingly looking to haven assets outside of the Swiss Franc and precious metals. The blockchain system which incorporates a high degree of transaction protection and safety offers lower transaction costs than the traditional banking and credit card system which increases its attractiveness. Similar to the boost the digital currency received during the events in Cyprus in 2013, it is now seeing resurgent interest, this time from Greek buyers with increasing interest in hedging against the possibility of an exit. Although well off its 2013 highs near $1000 per coin increasing adoption will likely cause substantial bitcoin appreciation.

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EURUSD Ascending Triangle Technical Pattern

The Euro broadly benefited from yesterday’s losses in the dollar despite the looming threat of a Greek exit as the FOMC indicated higher interest rates in the pipeline. Even though higher rates would imply more upside for the dollar, the ECB’s faltering purchases of sovereign debt means that the pressure on the Euro might potentially be abating in the near-term. The ascending triangle pattern in EURUSD is the confluence of a near-term uptrend line and resistance line forming a consolidation in the pair. The pattern has a bullish bias with any move above 1.1380 considered a breakout trade to be accompanied by renewed upwards momentum. A move below the uptrend line would be indicative of a potential reversal lower and breakdown in the pattern.

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