Advance Guidance to become more guarded

It has been a feature of Janet Yellen’s Chairmanship of the Federal Reserve that she has believed in providing as much guidance to the market as she is able to about her views and those of her colleagues about the future direction of interest rates and what, in their view, are the drivers of their decisions.

This week’s employment report is a case in point, before the announcement of her departure, traders would have been well aware of the effect of the data on next week’s FOMC meeting.

The judgement of what is likely to be strong enough to move monetary policy is now, and probably will be for a few months until Jerome Powell is settled into the role,  in the hands of traders. There is expectation for a fairly strong number on Friday, with +250k likely to see the dollar move higher as that will cement a hike. It is a downside surprise that will set traders’ minds racing.  

Any feeling that the Fed. won’t move next week will be bad for the dollar and the index could test recent lows close to 92.50. The rate of increase in hourly earnings will interest FOMC members as that is a real gauge of future inflation as it will feed into CPI going forward. Any continuation of the recent growth will be welcome with anything around 2.5% providing support to the “rate hike camp”.

Brexit: A total mess

It is hard to imagine a more complete disaster than the way Brexit has been handled. This is a charge to be levelled at both sides in the negotiation process although it is fairly clear that the EU negotiators have allowed the U.K. sufficient rope to hang themselves.

There is a saying that is you fail to plan you plan to fail and that is certainly true of Theresa May and her Government. The triggering of Article 50 was done with undue haste as that has set the clock ticking with no plan in place. The concentration on the divorce bill which, to be fair, has been the focus of attention of both sides has left the other two issues dangerously ill-considered. Now the question of the Irish border has risen to bite everyone involved with the role of the European Court of Human Rights in U.K. domestic affairs still to be agreed.

It is testimony to just how short of Sterling the market is that it hasn’t collapsed completely this week and frankly amazing that traders are prepared to continue to live in hope of an agreement this week.  

There is no commitment or sense of urgency from Brussels to reach an agreement before next week’s Heads of Government Summit since they can be ambivalent to the whole process leaving Theresa May scratching around to gain support for a plan that is bound to fail.

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New Paradigm means better liquidity

In days gone by it would have been a major concern to traders that the amount of potential market moving events still happening late into December would be marred by a complete lack of liquidity. As trading has become more “automated” liquidity has improved without question but the “rise of the bots” has seen any gaps exploited.

With next week’s FOMC meeting likely to be pivotal and the EU heads of Government Summit coinciding, there is potential for one of the busiest weeks of the year. There is also an MPC meeting in the U.K. which following the fiasco of the dovish hike, is unlikely to do any more than vote for no change although the voting numbers will be interesting. Inflation is reported prior to the meeting and should it have continued to rise despite the rate hike. Mark Carney will have his work cut out to continue to provide supportive comments concerning the future path of interest rates following his assertion that that last month’s change was a one-off.

No one has really had time to consider 2018 yet with so much happening that could still provide direction into the New Year.

No Brexit agreement and no rate hike in the U.S. will force a change in several long-term strategies and will place the Euro at the top of many trader’s Christmas list!

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