What’s up guys.
As the day of FOMC meeting is just around the corner and almost all market speculations boil down to the rate hike dilemma I would also like to add my two cents into this buzz.
In attempt to predict the FED’s move it is useful to have a look at how “big money” prepares to the event. Government bond yields is a good indicator of investors’ sentiments as these securities are considered as one of the safest places to ride out market turbulence. The relationship between bond yields and ” degree of panic” on the market is pretty simple: bond yields drop when the demand for government bonds increase (investors start to buy up them expecting recession or in case of increased market uncertainty) and rise when investors quit government debts switching to higher-yield assets in times of market buoyancy).
So lets take a look what are the bond yields ahead of September FED meeting:
Same response from Japan and German bond yields:
As ECB delays boosting its stimulus program signaling the Central Bank plays down recession risks the FED may be urged to hike the rate sooner than expected as developing with low rates and full employment US economy risks to overheat. September odds was as high as 30%, halved after the FED Brainard stressed in her speech that “prudence warranted as hiking rates poses risks”.
From the other hand, the hike odds priced in the federal funds rate futures are too low for the FED to act, so the rate will be probably left unchanged in September to avoid shocking reaction on the markets.
Based on the reasoning above here is possible trading ideas in the run-up to FED meeting:
If FED abstains from hiking rates, its likely to see a sharp drop in XAUUSD and boost in global equities. The bullion has a room for some more gains driven by uncertainty by in case of no change in FED policy it would have sense to bet on protracted decline.
Trading call at XAUUSD: Sell Limit at $1,340, Target: $1,310-1,300, SL – $1,350
Despite weak CPI, there is nothing serious that threatens UK economy. After a retreat the pound will probably repeat attempt to conquer 1.34 level:
Trading call: BUY GBPUSD at 1.3230, SL – 1.31700, TP – 1.3400
That’s it for today.
If you have any questions and comments leave them in the box below.