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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 77% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Market Alert: Fed decision - 4 key issues to watch

11:59 18 September 2019

The US Fed will announce its decision today at 7pm BST (8pm CEST) that will be followed by a post-meeting conference 30 minutes later. As the second rate cut has been fully priced in, the market reaction will depend of 4 issues that we take a look at in this analysis.

Dot-plot

The last dot-plot was released in June and back then most dovish members (7 dots) pointed at 2 cuts this year – that’s what we are going to get today. The question is how much more dovish the FOMC has become. Some dots will move lower as radical members (think Bullard, Kashkari) will want more easing. So 2-3 dots pointing at another cut this year will not move markets – 5 or more would do but we think it’s a high bar as that would actually question Powell’s vision of mid-cycle adjustment.

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Markets expect another cut this year after September. The question is: will it be validated by 5 or more “dots”? Source: Bloomberg

Dissidents

Some FOMC members are voicing their resistance to more rate cuts but not all of them have voting right today. We think we’ll have 2 dissident votes (same as July) but the risk is on having 3 (rather than less than 2) so here we could have a hawkish surprise if anything.


Mid-cycle adjustment phrase

Last time President Powell said the cut was just a small “mid-cycle adjustment”, not a beginning of the new easing wave. This phrase hasn’t been well received by the markets so Powell might want to avoid it but he will be asked at the conference and at present it’s hard to imagine he could change his heart in this area. So wording could be different but vision could be similar.

Liquidity issues

US dollar liquidity has been scarce recently causing market rates to go up and there have been suggestions that the Fed needs to take decisive steps in this area. In our view, the FOMC will treat this as a technical issue and pledge to “act as needed” to maintain rates close to the target. Any suggestion of additional stimulus to address this (especially via QE) would be extremely dovish but we think it’s unlikely.

To sum up – opening room for more easing from dot-plot and Powell would be dovish and that’s been historically indices positive and USD negative. On the other hand a “hawkish cut”, without promising more easing was usually indices negative and USD positive.  
 

Top market to watch: US500


The US500 started a correction after the July FOMC meeting after the Fed cut rates but Powell called the move a “mid-cycle adjustment”. Since then all the losses have been recovered on hopes for more easing, expectations from China-US trade talks and at least some encouraging US macro data. Clearly, trust in more easing will be very important in setting a direction for US500 that is within 1% from the all-time high. Source: xStation5

This content has been created by XTB S.A. This service is provided by XTB S.A., with its registered office in Warsaw, at Prosta 67, 00-838 Warsaw, Poland, entered in the register of entrepreneurs of the National Court Register (Krajowy Rejestr Sądowy) conducted by District Court for the Capital City of Warsaw, XII Commercial Division of the National Court Register under KRS number 0000217580, REGON number 015803782 and Tax Identification Number (NIP) 527-24-43-955, with the fully paid up share capital in the amount of PLN 5.869.181,75. XTB S.A. conducts brokerage activities on the basis of the license granted by Polish Securities and Exchange Commission on 8th November 2005 No. DDM-M-4021-57-1/2005 and is supervised by Polish Supervision Authority.

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