Fed Statement Encourages USD Bulls

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Growth “Strong”

As expected, following the last .25% rate rise in June, the Fed kept policy unchanged at its August meeting with a statement that was mostly unchanged from last time. However, the statement did contain a few subtle but important changes which reinforced the Fed’s hawkish shift. The key change was where the Fed noted that economic activity is now increasing at a “strong” rather than “solid” pace.

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Inflation Improving

Regarding inflation, there was also a positive change with the Fed acknowledging that inflation will “remain near 2%” rather than having “moved close to 2%”. Regarding the labour market, the language remained the same, noting that conditions “continued to strengthen” while household spending and business fixed investment have “grown strongly”, an upgrade from having “picked up” in June.

Aside from these key alterations, there were no other significant adjustments and the Fed reaffirmed that its policy stance remains accommodative in order to support continued progress with inflation. In all, the meeting was a positive for USD as the Fed reinforced the view that it will press ahead with the two further hikes planned this year.

Trade Tariffs Not A Concern

Encouragingly for bulls, the statement made no mention of the impact that US trade tariffs are having on the US economy or of any concerns that the Fed has regarding US trade policy. In light of the recent bumper US GDP reading for Q2 which highlighted the strongest growth in four years, there is little at the moment to suggest that the Fed will deviate from its plan. Indeed, if data continues to print strongly, risks are skewed to the upside with a chance that the Fed will pursue a more aggressive tightening path than is currently projected.

Trump Comments Ignored

The meeting was an important one as it was the first since President Trump recently commented that he would prefer the Fed not to tighten and felt that rate hikes were hampering the prospects for the US economy. However, this clearly had no bearing on the Fed and current market pricing favours the September meeting for the Fed’s next rate hike.

Meeting Backs Up Powell’s Comments

The meeting also comes in the wake of comments by Fed Chairman Powell, who gave testimony to the Senate, reaffirming the Fed’s satisfaction with the way the economy is performing and its continued belief in the need for further gradual policy increases. Unfortunately, as there was no press conference this time around, there was no opportunity to hear from Powell.

September Meeting In Focus

With the economy continuing to perform strongly and data highlighting robust growth and positive momentum in inflation, the Fed is comfortably on track for its planned further rate increases and barring any sharp downturn in data or any significant escalation in trade tensions with China, the September meeting looks likely to be the next platform for a further .25% increase.

Market Reaction & Technical Perspective

usd chart
USD-Chart

With very few changes to the statement and no press conference, there was little to provide much of a directional catalyst at this meeting. However, the few changes that were made, provided further encouragement for US bulls and fuelled mild USD buying across the board.

The Index is now putting further pressure on the 95.10 resistance region which, if broken, would negate the potential inverse head and shoulder setup and turn focus to further immediate Dollar upside. The next key level to watch will be the 97.83 level which is the 61.8% retracement from 2016 highs.

eur usd chart
EURUSD

EURUSD is now challenging the lower trend line of the local contracting triangle pattern. If broken, focus will turn to a further test of the 1.1466 – 1.1546 support region, which is a major level for prices currently. If this level goes, the potential head and shoulders pattern will be invalidated and momentum players will likely join the market, exacerbating EUR selling and bringing prices down further.

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