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Equity markets drifted lower following yesterday’s release of the minutes from the Fed’s FOMC meeting in April. The sell-off has picked up somewhat this afternoon. Nevertheless, it was the dollar which moved most in the immediate aftermath of the release. The greenback soared as the FOMC’s minutes were interpreted as being more hawkish than anticipated given the April statement. Investors have rushed to cut the odds on a rate hike at next month’s Fed meeting after having discounted the likelihood of a June rise for most of this year. Not only that, but markets are also beginning to price in a rate hike in July as well. Of course, it could be argued that the minutes from the April meeting are already old news as new information has come in since then. However, this week we also had hawkish comments from San Francisco Fed President John Williams and Atlanta Fed President Dennis Lockhart. Neither is a voting member of the FOMC this year but nevertheless both said that rates could be hiked two or three times in 2016.
  
Not only that but earlier today President of the Federal Reserve Bank of Richmond Jeffrey Lacker also came out with some hawkish comments saying he was comfortable with the idea of four hikes in 2016. But like his colleagues Lockhart and Williams, Lacker doesn’t have a vote on the FOMC this year. Meanwhile, the markets were waiting for Fed Vice Chairman Stanley Fischer to shed further light on the central bank’s thinking. Unfortunately Mr Fischer declined to comment on either the economy or monetary policy.
  
Now we’ve seen all this stuff before whereby the Fed goes out of its way to keep investors guessing over the direction of future monetary policy. But is it really conceivable that in a few short months we’ve gone from quizzing Mrs Yellen over “helicopter money” to now considering the possibility of 100 basis points of rate hikes in 2016? Really? After all the agonising over one 25 basis point hike back in December, and amid all the uncertainty over the UK referendum, a US Presidential Election and a yuan pegged to a rising dollar? It looks to me like the Federal Reserve is copying David Cameron’s anti-Brexit Project Fear campaign.
  
In the meantime, the stronger dollar is hurting gold. Here’s the daily chart. As you can see we’re broken support around $1,260 and are currently trading below the psychologically significant $1,250 level. Support may come in around the lower upward-sloping trend line near $1,240. But a sustained break below here could see gold back to $1,220 or even lower. Ultimately it’s all down to the dollar. Personally I think this is a shake-out of dollar-shorts which will run its course eventually. I think the global economy needs a weaker dollar to keep China afloat and boost commodity prices amongst other things. But there’s no doubt investors are getting nervous and we could be in for a rocky old summer. 
  
Now we’ve seen all this stuff before whereby the Fed goes out of its way to keep investors guessing over the direction of future monetary policy.
 
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Posted by David Morrison

Category: PM Bulletin


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