With popcorn at hand and all eyes and ears on screens and speakers last night, the June FOMC meeting didn’t disappoint in its capacity to be the major risk event on the calendar. The Fed kept its policy rates and pace of its bond buying programme unchanged as expected, but it turned a lot more optimistic about the economy going forward.
Growth is seen higher at 7% (yes SEVEN!) in 2021, half a percent up from the prior forecast, 3.3% next year and 2.4% in 2023. Unemployment was left broadly unchanged and core PCE inflation is forecast to rise sharply this year at 3% (+0.8% higher than the previous estimate) before slowing to 2.1% in the following two years. Chair Powell admitted higher inflation could go on for longer though he doesn’t expect it to feed into expectations.
Big dot plot change
The majority of the FOMC brought forward en masse their rate hike outlook and this proved the biggest sucker punch to markets who have been guided over the past eighteen months by nonstop easing and a persistently dovish Fed who has remained purposefully behind the curve. Two hikes are now suggested in 2023 (from zero in the prior meeting) and seven out of 18 members already expect one next year. This all means that tapering, let along the beginning of taper talk, is not so far away!
This is all quite a shock from the FOMC even if markets had set itself up for one, with traders expecting the Fed to remain fairly cautious while acknowledging rising price pressures. Going forward, the Fed is now more likely to respond to data and is more prepared to tighten than previously thought.
The dollar has burst higher and there is plenty of room for US real rates to continue rising from their low base which means more upside.
This should also mean higher volatility which is good news for traders! EUR/USD especially, has broken out of its recent range and smashed down through the 1.21 support. Although the pair paused last night at the 200-day SMA, this morning has seen follow-through selling as we dip towards the next Fib level at 1.1950.
Gold also got hit as swarms of buyers dashed for the dollar and shorts were desperate to cover positions. After the 200-day SMA got taken out overnight, $1800 is the next support level ahead of the 100-day SMA just below here.
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