The FOMC Meeting has Currency Traders on Tenterhooks

Various economic indicators are shifting expectations in favour of a rate hike!

How to Gauge Market Sentiment Ahead of the FOMC Meeting in September?

Q3, 2015 has been characterised by significant volatility given the $7.7 trillion collapse in global equities. Structural weakness in the Chinese economy has precipitated an equities meltdown that is proving difficult to correct. The Chinese stock market bubble that reached its zenith in June, then popped, plunged world markets into chaos. On Black Monday, the Shanghai Composite Index erased 8.5% of its value and took global bourses down with it. It has since emerged that the government was encouraging people to invest in the stock market. This they did by borrowing heavily, and ploughing their money haphazardly into stocks. This created a bubble that has since burst, and eroded investor confidence in equities.

The correlation between the equities meltdown in China and the subsequent declines on European stock markets, other Asian markets, emerging market economies, and American markets is clear. China is the world’s second-largest economy and as such, it consumes tremendous quantities of raw materials, energy resources and other commodities. With slowing Chinese demand comes depressed commodities prices. This is reflected in weak prices for crude oil, copper, natural gas, metals et al. The most dramatic effects of economic weakness in China are seen in emerging market economies and their currencies. The Brazilian real, the South African Rand, the Russian ruble, the Turkish lira and other currencies have suffered immeasurably since the economic meltdown in China.

Dollar Strength is Exacerbating Global Weakness

Banc De Binary economic analysts caution traders not to focus exclusively on China and the inherent structural problems in that economy. While it is true that demand is slowing in China and that the purported GDP at 7% is the weakest in 25 years, blame cannot be apportioned solely on this country. Weakness in Europe remains an integral component in the global economic puzzle. Greece has long been a thorn in the side of EUR strength. That multiple bailouts have been approved for Greece has helped to bolster confidence in the European Union, but Greece remains a highly contentious economic issue. The European Central Bank is now weighing additional quantitative easing and related measures to stimulate economic activity in the EU. This is adding further downward pressure on the European currency, causing a glut of put options in the binary options trading arena. Indeed, it is not only the Euro that has weakened of late, it is also the GBP. China, Europe and the US have been hit with poor PMI data that confirms what everyone already knows from global equities markets: manufacturing slowdowns are the norm.

However, the economic data from the US remains robust by comparison and this is driving dollar demand. The greenback remains the preferred currency, and this is also being fuelled by an upcoming FOMC meeting on September 16-17. Should Janet Yellen and Stanley Fischer decide to hike interest rates, dollar demand will increase and competing currencies will depreciate in value. Since most commodities are priced in dollars, they will be relatively more expensive and the demand for them will drop accordingly. Therefore, Yellen and policymakers at the Fed will have to take multiple factors into consideration before approving a rate hike. The Fed has targeted an inflation rate for the US of 2%, and while the inflation rate is currently only at approximately 1.6%, Fischer and various other policymakers do not believe that the targeted inflation rate should be achieved before a rate hike is implemented.

US Economic Data Impresses

As economic data for US manufacturing, non-farm payrolls, private payrolls, unemployment figures, average earnings and average workweek hours improves, so the likelihood of a rate hike increases. On 3 September the ISM non-manufacturing PMI data was released and the forecast figure was approximately 58.1, but the actual figure came in at 59.0. This was better than expectations and again added impetus to the likelihood of a Fed rate hike in mid-September. While economic analysts have been evaluating percentages by conducting polls to gauge investor sentiment, the more accurate measure would be the key releases of economic data leading up to the September 16-17 FOMC meeting. The more the actual figures beat the forecast figures, the greater the chance of a rate hike. And in terms of the actual size of the rate hike, a hike of 0.25 points is expected. We have consistently seen declining unemployment in 2015, and average earnings have increased by 0.2% in July, with year-on-year GDP advancing 2.3% (July figures).

It is still not clear whether the rate hike will take place in September, or be pushed back to October, November or possibly even December. However various presidents of Federal Reserve Banks across the country are of the opinion that a steady increase is preferable to a sharp and sudden rate hike. The US jobs report for non-farm payrolls and private payrolls for August came in under expectations. However the June and July figures were revised upwards – counterbalancing the negatives for August. Viewed in perspective, the US economy remains strong, and with many indicators above the critical 50.0 level, expansion rather than contraction is the norm. It should however be remembered that the most recent data from July has largely come in under median forecast expectations. The high volatility has seen a large influx of traders wanting to learn binary options to capitalize on global volatility.

The USD/GBP Currency Pair

The US dollar has shown plenty of bullishness against the GBP of late. While the sterling started the first week of September at $1.5433, it retreated to $1.5219 by Friday, 4 September. The UK economy is structurally sound, but there are factors weighing on the British currency. The September 16-17 FOMC meeting is adding external pressure on the currency by making the USD more attractive. Other economic data released in the UK has weakened the GBP, and the upcoming release of the Bank of England Asset Purchase Target for September 2015 as well as the Bank of England Inflation Target for the next year will have a strong impact on the currency. A Fed rate hike will increase dollar demand and cause a sell-off of sterling. Other factors that are weighing on the pound include poor PMI data in the UK, the upcoming referendum on UK membership of the EU, and a recent survey that a majority of Scots favour independence from the UK, despite the September 2014 referendum results. The GBP/USD currency pair is trading at $1.51673, and the pair sustained consecutive losses leading up to the Labor Day weekend in the US.