Tag: FOMC

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Forex Technical Analysis

US Dollar Index awaiting FOMC Meeting in the Extreme Bearish Zone

The US Dollar Index (DXY) reached a new yearly low of 90.128, expecting the last FOMC interest rate decision meeting of the year. The analysts’ consensus anticipates the rate unchanged at 0.25% by the FED.

The US Dollar Index (DXY) reached a new yearly low of 90.128, expecting the last FOMC interest rate decision meeting of the year. The analysts’ consensus anticipates the rate unchanged at 0.25% by the FED.

The US Dollar Index (DXY) reached a new yearly low of 90.128, expecting the last FOMC interest rate decision meeting of the year. The analysts’ consensus anticipates the rate unchanged at 0.25% by the FED.

Source: TradingEconomics.com

Technical Overview

The short-term overview for the Greenback illustrated in the following 8-hour chart displays the short-term market participants’ sentiment unfolded by the 90-day high and low range, which shows the price action moving in the extreme bearish sentiment zone. Likewise, the bullish divergence observed on the EMA(60) to Close Index carries to expect a recovery for the following trading sessions.

On the other hand, the short-term primary trend outlined with its trend-line drawn in blue reveals that the bearish bias remains intact since September 25th, when the price topped at 94.742. The secondary trend plotted with the trend-line in green shows the acceleration of the downward movement that began on November 04th at 94.302.

Nevertheless, the breakdown of the last sideways range developed by DXY during the latest trading session, combined with the bullish divergence observed between the price and the EMA to Close indicator, makes us suspect a bounce, which could hit the resistance of the extreme bearish sentiment zone at 91.282.

Short-term Technical Outlook

The short-term Elliott wave view for the US Dollar Index unfolded by the next 4-hour chart exposes the bearish progression of wave ((iii)) of Minute degree labeled in black that belongs to the downward sequence that began on November 04th at 94.302. 

 

According to the textbook, the price action requires to confirm the third wave’s completion before acknowledging the start of the wave ((iv)) in black. In this regard, the internal structure of the wave ((iii)) added to the bullish divergence observed in the MACD oscillator; thus, suggesting the advance in wave (v) of Minuette degree identified in blue.

On the other hand, considering both the alternation principle and that the second wave of the same degree looks simple in terms of price and time, the next corrective structure should be complex in terms of price, time, or both.

In this context, the next DXY path could produce a bounce corresponding to the fourth wave of Minute degree, advancing to the supply zone between 91.014 and 91.200, and even strike the 91.580 level.

In summary, the US Dollar Index looks advancing in the fifth wave of Minuette degree that belongs to the third wave of Minute degree. In this context, the price action could experience a bounce corresponding to the fourth wave of Minute degree, which could move up to 91.850. Nevertheless, if the price surpasses the invalidation level located at 92.107, the Greenback could be showing the start of a reversal of the current bearish trend.

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Forex Market Analysis

Daily Market Update: FOMC Meeting, Summit with North Korea, and US-China Trade War Update

 

News Commentary

 

In the FOMC meeting yesterday, the Fed showed that it would endure inflation rising above its goal for a time.

Policymakers also expect another interest rate

 

News Commentary

 

In the FOMC meeting yesterday, the Fed showed that it would endure inflation rising above its goal for a time.

Policymakers also expect another interest rate

 

News Commentary

 

In the FOMC meeting yesterday, the Fed showed that it would endure inflation rising above its goal for a time.

Policymakers also expect another interest rate increase would be warranted “soon” if the U.S. economic outlook remains fit.

The Fed appeared to let inflation run above the 2% target for a “temporary period”, with no rush to tighten monetary policy.

An important small edit, the Fed members had discussed raising the interest rate by 20 basis points, rather than by a widely anticipated 25 basis points.

Trump poured more doubt on plans for the summit with North Korean leader Kim Jong Un, saying he would know next week whether the meeting would take place or not.

The U.S. Commerce Department said on Wednesday that it would apply a national security investigation into car and truck imports, a move that could lead to tariffs like those on steel and aluminium in March.

Trump also called for “a different structure” in any trade deal with China, raising uncertainty over the negotiations.

On Thursday, China’s Commerce Ministry clarified that they didn’t promise to cut China’s trade surplus with the U.S. by a certain figure and that it hopes the U.S. implements measures promised during trade negotiations as soon as possible.

 

Chart Analysis

 

US INDEX

On the daily chart, the price has broken the lower trend line from the high of 2017.

But the price is located at the key resistance of 94.25.

There’s a bat harmonic pattern that boosts the retracement bias for the index.

Divergent on RSI assured this possible downfall.

So, If the price bounces beneath from the resistance level, it may reach 92.6 to retest the broken trend.



 

AUD/USD

On the daily chart, the price had a false break beneath the support zone 0.75-0.7535.

That enhances the harmonic pattern AB=CD, with breaking a descending channel

The pair had risen with an engulfing candle and pulled back with a hammer, touching the support zone again.

Along with divergence in RSI, the price is ready for the next move up to 0.774 which is a level with a combination of the lower trend line from the high of 2018 and the broken uptrend.



 

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Forex Market Analysis

Main European Indexes Reach Areas of a Potential Reversal

Hot Topics:

  • Main European indexes reach areas of a potential reversal.
  • Dollar maintains the upward trend after the Fed’s decision to keep the rate unchanged.

Main European indexes reach areas of a potential reversal.

The FTSE 100 is developing an ascending wedge pattern; the bullish movement has led the British index to reach a critical resistance at the 7,572.2 level, the area from which we expect it to begin making a corrective move, possibly down to the 7,326 pivot. Sales are considered if the price closes below the breakout candle at 7,523.

DAX 30. After the break on Tuesday, May 1st, the German index climbed above the resistance at 12,622.4, closing the session in the blue box that we have been watching since last week. This bullish movement that was developed in five waves could begin to correct in three waves, and from the end of this potential drop-down, we would start valuing long positions.

Dollar maintains the upward trend after the Fed’s decision to keep the rate unchanged.

The EURUSD continues its bearish trend consolidating below the 1.20 level; the Single Currency could fall from 1.1991 to 1.1833, where it could begin a bounce. Long positions are considered above the 1.2011 level.

The Pound has broken down the support level of 1.36, entering in the potential reversal zone, where we foresee that it could perform a lower low reaching the 1.3481 level. At this level, buyers may be waiting to place their long positions with a target around the 1.39 zone.

The Swiss franc is forming a top pattern around parity. It could form a spike, which we estimate should not exceed 1.03, where it should begin a corrective move. Our most conservative vision on short positions is once the price breaks-down below 0.9955 with a profit target at 0.9836.

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Forex Educational Library

FOMC Statement- March 2018

The information received by the Federal Open Market Committee (FOMC), since its meeting in January, has shown signs of further strengthening of the labour market and economic activity has been growing at moderate but solid rates. Job gains have grown strong in recent months, and the unemployment rate has remained at low levels. Recent data shows that the growth rate of household spending and business fixed investment has grown in 2018 at moderate rates after a large growth at the end of 2017.

On a twelve-month basis, overall inflation and inflation for items other than food and energy has remained below 2%. The economic outlook has improved in recent months due to the good results evidenced throughout 2017, and since the tax reform approved at the end of the same year.

The committee expected that with gradual adjustments in the monetary policy stance, the economy would continue to behave positively in the medium term and labour market conditions would remain robust. Regarding inflation and its annual base, the committee expected that in the short term this indicator would be close to 2% and that the bank’s goal would be met.

Due to the behaviour of the labour market, the main sectors of the economy and inflation, the committee decided to raise the target range of federal funds from 1.5% to 1.75%. The committee was explicit in that the monetary policy stance would remain accommodative as long as it was necessary for inflation to return to 2%.

This decision was in line with market expectations, so there was no strong reaction from the market. In the projections of the path of the interest rate, there is still no unanimity on what the next steps of the Federal Reserve will be as some expect a stronger policy, so they expect four increases during 2018. For other analysts, the path will continue the road stipulated so they expect only three increases during the current year.

The following graph shows the main projections of the committee. This graph shows economic growth above the natural long-term rate and the rates expected since the December meeting has improved. The unemployment rate also shows a very positive behaviour and is below the long-term rate. Regarding the different inflation measures, inflation is expected below the bank’s target for 2018, but very close to the target level, and for the next two years, an optimal inflation rate is expected according to the bank’s mandate.

Graph 82.Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, March 2018. Retrieved 23rd March 2018 from https://www.federalreserve.gov/monetarypolicy/files/monetary20180321a1.pdf

In the press conference, the president of the Federal Reserve Jerome Powell expressed that the decision to raise the target range of the interest rate marks another step in the normalisation of monetary policy, a process that has been underway for several years. But in his statements, some caution was evident and showing that the path of the interest rate considered only two more hikes in 2018.

Job gains averaged 240,000 per month in the last three months, which is a very positive rate and makes it possible for new workers to be absorbed. The unemployment rate remained at low rates in February, standing at 4.1%, while the rate of labour market participation increased.

According to Powell, that is a positive signal given that the economically active population is getting older, so this leads to the participation rate to the downside, but with the new entries this negative effect is offset by the entry of new workers.

Also, the president of the Federal Reserve has concluded that there are certain specific factors that have contributed to the greater economic growth observed in recent months and these are:

  • Tax reform
  • Ongoing Jobs Gains
  • Foreign growth is strong
  • Overall financial conditions remain accommodative

Regarding inflation, Powell was clear that inflation was still below 2% regardless of what measure was used. According to the president of the Federal Reserve, this was due to unusual price reductions that occurred in late 2016 and early 2017. But for Powell, as the months passed in 2018, these unusual events would disappear, and inflation would be very close to 2 %.

In his statements, the president of the Federal Reserve specified that, if the rates rose too slowly, this would increase the risk that monetary policy would have to adjust abruptly in the future if a shock should occur in the economy. At the same time, the committee wanted to prevent inflation from remaining below the target which could reduce the chances of acting quickly in the face of a recession in the US economy.

Finally, Powell pointed out that the reduction in the balance sheet that began in October was progressing smoothly. Only specific conditions of the economy could curb the normalisation of the balance sheet of the Federal Reserve. President Powell was emphatic that they would use the balance sheet in addition to the interest rate to intervene in the economy if a deep economic recession were to occur.

In conclusion, the federal committee decided to raise the federal funds rate as expected by the market due to the good performance of the economy which continued to grow at high rates and above the long-term level. Although inflation was not at the desired level, according to the committee, this was due to transitory effects that would fade over the months, and thus inflation would be in the target range.

As already mentioned, the economy showed good signs due to the labour market, so the bank decided to raise rates, but the committee remained cautious about the future of the economy because it was not ruled out that a recession would occur. According to the statements made at the press conference, some indecision was evident on the part of the committee as they evaluated the two possible scenarios against the interest rate.

If they raised it too quickly they could slow down the economy and thereby affect the labour market, which would lead to a drop in inflation, which would lead to a complex economic scenario as future increases would not be possible, and this would restrict the use of the monetary policy. On the contrary, If the committee raised it too slowly, a scenario could be generated where any economic shock, whether internal or external, could also affect the economic growth of the United States and limit future increases in the interest rate.

The market is still undecided if the FED will make two or three more rate hikes during the current year. Some analysts question why the Federal Reserve continues to raise rates if the inflation rate still shows no stability. For them, the central bank should be more cautious in its monetary policy because they could be in the second scenario where the economy still needs an accommodative policy so that the medium term could be limited future increases in the rate as well as the normalisation of the balance sheet.

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Forex Educational Library

Components of the Federal Reserve

To understand how each meeting of the Federal Open Market Committee (FOMC) is conducted and who is in charge of monetary policy we should understand how the Federal Reserve is

To understand how each meeting of the Federal Open Market Committee (FOMC) is conducted and who is in charge of monetary policy we should understand how the Federal Reserve is

To understand how each meeting of the Federal Open Market Committee (FOMC) is conducted and who is in charge of monetary policy we should understand how the Federal Reserve is composed, who are its members and how they are elected. In addition, we should know what the tasks are of each entity of the reserve to determine how they will act in the meetings they have throughout the year. The Federal Reserve is not like other central banks as there is some independence between the banks in each district, so it is important to understand how the bank is made up.

The Federal Reserve System is the central bank of the United States. It develops five main functions to promote the efficient operation of the economy of the United States and thus achieve a better welfare of the public in general. The five main functions are:

Control the monetary policy of the country: The objective of the monetary policy is to promote maximum employment, stable prices and moderate interest rates in the United States economy.

Promote the stability of the financial system: It seeks to minimise and contain systematic risk through the activity of monitoring local and foreign financial activity.

Promote the safety and soundness of individual financial institutions: Monitor the activity of each bank individually to analyse its impact on the banking system as a whole.

Promote the security and efficiency of the payment and settlement system: Through services to the banking industry and the US government that facilitate transactions and payments in US dollars.

Promote consumer protection and community development: Through consumer-centred monitoring and review, research and analysis of emerging consumer issues and trends, community economic development activities and administration of consumer laws and regulations.

The structure of the central bank is decentralised so the Federal Reserve is divided into 12 districts. The boundaries of each district were based on the commercial regions that existed in 1913 and other economic variables, so each district of the central bank does not necessarily coincide with the geographical lines of each state. In addition, each district is identified by a number, which makes it easier to identify which district is being analysed in the bank’s reports. In the following graph, you can see the 12 districts of the banks of the reserve.

Graph 43. Federal Reserve Banks. Retrieved 13th January 2017, from https://www.federalreserve.gov/aboutthefed/structure-federal-reserve-system.htm

 

The twelve districts of the Federal Reserve operate independently, but under the supervision of the board of governors of the reserve. In principle, it was determined that each district will work independently and make its monetary policy decisions separately, but when the national economy became more complex and more integrated, the districts had to cooperate more with each other and coordinate their policies. In 1935 the Federal Open Market Committee (FOMC) was created, showing a unification of the concepts of each district.

In the mid-1980s, the Federal Reserve centralised and consolidated its financial services as well as creating support channels between the different districts. Reserve banks have become more efficient through the conclusion of service agreements within the system that assign responsibilities for services and functions of national scope between each of the 12 banks.

The drafters of the Federal Reserve Act initially rejected the concept of a single central bank. Instead, a bank was formulated with a system of three fundamental pillars. First, a board of governors of the central bank that would have the task of supervising the work of others. Second, a decentralised structure in its operation of 12 banks in the reserve. And third, a combination of public and private characteristics in its management. Although some central bank entities share characteristics with private sector entities, the Federal Reserve was established to serve public interests. In the following graphs, you can see the composition of the Federal Reserve and its main tasks (graph 44), and how the Federal Reserve was organised (graph 45).

Graph 44. Purposes and Functions. Retrieved 13th January 2017, from https://www.federalreserve.gov/aboutthefed/structure-federal-reserve-system.htm

Graph 45. Purposes and Functions. Retrieved 13th January 2017, from https://www.federalreserve.gov/aboutthefed/structure-federal-reserve-system.htm

In summary, there are three key entities in the Federal Reserve system:

  • The Board of Governors of the reserve.
  • The Federal Open Market Committee (FOMC).
  • The Federal Reserve banks.

 

The board of governors is a federal government agency that reports directly to the Congress, provides general guidance to the system and oversees the 12 reserve banks.

Within the system, there are certain responsibilities that are shared between the Board of Governors in Washington D.C. (whose members are set by the president with the consent of the Senate) and the banks and branches the federal reserve. While the Federal Reserve has frequent communication with the executive branch and congressional officials, its decisions are made independently.

In addition to these key parts in the Federal Reserve, there are two other significant entities that contribute to the functions of the reserve.

  • Depository Institutions (banks, credit unions and savings banks): Depository Institutions offer transaction and check accounts to the public, and they can maintain their own accounts in their local Federal Reserve banks. The depository institutions must comply with the reservation requirements, that is, keep a certain amount of cash, either in cash or in an account in a Reserve Bank based on the total balances in the current accounts they hold.
  • Advisory Committees of the Federal Reserve System: They make recommendations to the Board of Governors and reserve banks depending on the functions of each one. There are four advisory councils that assist and advise the board on public policy issues.

The Federal Reserve has its own advisory committees that help in making decisions, but one of the most important committees is the one that advises them on issues of agriculture, small businesses and labour market issues. The board of governors requests committee reports twice a year to assess the state of the economy and national sectors.

As mentioned in the introduction, the goal of the Board of Governors, federal banks and the FOMC is to work together to promote the health of the United States economy and price stability, coupled with the stability of the national financial system.

The way the Federal Reserve works is as follows. The Board of Governors, located in Washington D.C., is the governing body of the federal reserve system. It is made up of seven members who are nominated by the President of the United States and are confirmed in their positions by the Senate. The board guides the operation of the federal reserve system to promote the objectives and complete the responsibilities given to the reserve system.

All board members serve on the FOMC, which is the body within the Federal Reserve that establishes monetary policy. Each member of the Board of Governors is appointed for a period of 14 years; the terms are staggered so that a term expires on January 31 of each even year. After completing a full 14-year term, a Board member cannot be reappointed. The president and vice president of the Board are also appointed by the United States President and confirmed by the Senate, but they only serve for a term of four years, although they can be re-elected for another four years.

Nominees for these positions must already be members of the Board or must be appointed simultaneously to the Board. The Board oversees the operations of the 12 reserve banks and shares with them the responsibility of supervising and regulating certain institutions and financial activities.

The board also provides general guidance, direction and supervision when reserve banks provide loans to deposit institutions, and when reserve banks provide financial services to depository institutions and the federal government. As part of the surveillance, the Board evaluates and approves the budgets of each reserve bank. It also ensures that the concerns of consumers are heard by the central bank to respond to their needs.

The 12 central banks and their 24 branches are the operating arms of the Federal Reserve System. Each reserve bank operates within its particular geographic area or district. Each reserve bank collects data and other information about the business and the needs of the community in each district. Then that information is compiled by the FOMC so that the Board acts based on these studies.

The Federal Open Market Committee (FOMC) is the part of the federal reserve that is responsible for setting the national monetary policy. The FOMC makes decisions regarding open market operations that affect the interest rate of federal funds (the interest rates at which financial institutions lend to each other), the size and composition of the assets held by the reserve and communications with the public about the future course of monetary policy.

The FOMC consists of 12 voting members (7 members of the board of governors, the president of the New York Federal Reserve and 4 of the remaining 11 district presidents who rotate in this position annually.) All 12 presidents of the Banks in the districts attend the meetings they have with the FOMC and participate in the discussion about the state of the economy and what steps to follow, but only the presidents who are members of the committee at the time of the meeting can vote in Monetary Policy Decisions. By law, the FOMC determines its own internal organisation and by tradition, the FOMC elects the president of the Board of Governors as its president and the president of the New York Federal Reserve bank as its vice president.

FOMC meetings are usually held eight times a year in Washington D.C. and other times as necessary. This committee is in charge of supervising the open market operations, which are the main tools of the Federal Reserve to execute the monetary policy of the United States.

The monetary policy of the Federal Reserve is the set of actions taken by the central bank to achieve three specific objectives:

  • Maximum employment.
  • Stable price levels.
  • Stable and moderate interest rates in the long term.

The Federal Reserve conducts the national monetary policy by controlling the interest rate in the short term of the economy and by influencing the availability and cost of credits in the economy. Since monetary policy directly affects interest rates, there is an indirect effect on the prices of the goods of the economy, on the wealth of people and on the exchange rates with respect to other currencies. Through these channels, monetary policy influences the level of spending of the economy, investment, production, the level of employment and inflation in the United States.

An effective monetary policy complements the government’s fiscal policy to sustain economic growth in both the short and long term. Although the objectives of the bank with regard to the monetary policy have not changed, it has changed the form and the tools to control the variables of interest. The Federal Reserve was created by Congress in 1913 to provide the nation with more security, flexibility and a more stable financial system.

In the minutes signed in the creation of the Federal Reserve, it was established that the Board of Governors and the FOMC should conduct monetary policy to promote its three main objectives. In this mandate that was given to the federal reserve, the objectives will be considered fulfilled when the majority of people who are looking for work are successful in their search, and when the prices of goods and services on average are relatively stable.

The importance of stable prices for the economy is given because when there is stability in this variable, there is a stable growth in the long term of the economy, the level of employability is higher and more stable and helps the bank’s third objective since with stable inflation and within certain ranges, the interest rate in the long term will be moderate and in line with the expectations of the agents in the economy. In addition, they generate stability in the wealth of the population so stable prices over time will help improve the quality of life of American citizens.

Stable prices will also encourage savings and capital formation since when there is a low risk that inflation is outside of its target ranges, the risk of erosion in the value of assets is reduced, which is very evident when there is high inflation. For example, if a consumer wants to buy a machine for his factory and there is very high inflation, in the future, that acquired asset will lose its value which will also affect the confidence of people, who could postpone their consumption and investment decisions.

One of the objectives of the Federal Reserve that on some occasions has not been achieved is to control and promote the stability of the financial system by reviewing and regulating financial institutions and their activities. A financial system is considered stable when all institutions of the system such as banks, savings banks and cooperatives can provide resources to households, businesses and the community in general, to invest and participate actively in the economy which will generate long-term growth term.

The resources and services that a stable financial system should have are lines of credit for business, loans to students, savings accounts, retirement accounts among others. That is, there is an effective connection between lenders and borrowers where both parties are benefited by certain returns of their money and in other cases by the money supply that cannot be obtained otherwise. A healthy system must face low transaction costs that do not affect the distribution of resources because if the costs of lending are very high, the function of banks will not be fulfilled and there will be no relationship between people with money to invest and those who do not. They have the necessary resources.

With the task of the Federal Reserve to monitor the health of the financial system, it is supposed that there should be some regulations for banks to be able to face adverse conditions in times of crisis or possible bank runs that would affect the liquidity of banks. Monitoring risk through the financial system is the task of the Federal Reserve and other regulatory entities which should ensure that banks do not take excessive risks which have sometimes failed since private banks manage to bypass those regulations.

In conclusion, the federal reserve is a system composed of three key entities such as the board of governors, the banks of the 12 districts and the FOMC. Each of these entities has its own responsibilities, but they are under the authority of the Board of Governors. Within the board members, there are some members who are chosen by the president of the republic and confirmed by the Senate. The Federal Reserve is responsible for maintaining the good performance of the economy with stable price variables that allow interest rates without greater volatility. It is also a mandate of the reserve to monitor the financial system of the United States, but private banks have managed to bypass these regulations. For investor decision-making, it is important to analyse in each meeting who are the presidents of the banks with votes and the situation in their district to project what will be the decision of each one regarding monetary policy.