Market mistiming

Fundamental analysis 19.06.2014

Janet Yellen continues to hold a course for the gradual phasing out of QE3, last night it was announced that the Fed is reducing the purchases of Treasury obligations and mortgage bonds by another $ 10 billion, bringing the total program to a modest $ 35 billion. The decision was more than expected and after the meeting the market was expecting comments from Yellen on the prospects of higher interest rates. 

Moreover, the Fed published its forecast for growth in the U.S. economy this year, and the estimate was revised from 2.9% to 2.2%. Seemingly negative news, but after a significant drawdown in the first quarter, when the GDP immediately lost 1%, the remaining three quarters of the economy can grow by about 3.4%. If all goes as planned, by the end of the year the Fed will have a serious argument for a rate increase. 

Another detail is that the Fed left untouched the inflation forecasts up to 2016, and all of them are still below target levels. This fact somewhat surprised the markets, given the optimistic data on the consumer price index (May growth of 0.4% and the increased by 0.3% in the previous month, which is almost twice higher than the forecast). Apparently, Janet Yellen believes this data to be only short-term "noise." 

The situation with the interest rates is even more compelling. Previously, the Fed indicated that by the end of 2015, the rate may be 1%, but now the regulator’s estimate changed to 1.25%. A positive market reaction is reflected the gap between the expectations in the market and the promise that the Fed thereby sends to the market. Apparently it is because over the past few years, the Fed carefully hammered into everyone’s heads the idea of "a long period of low interest rates." 

In general, it is a paradoxical situation. Yesterday was the fifth reduction of QE3, and the Fed officials gently hinted that next year they will start increasing rates, but the dollar continues to trade at the same levels. Moreover, the decrease in the Eurodollar, which we observed a few weeks ago, was caused by the news from the ECB, rather than expectations of imminent closure of the stimulus measures by the Fed. 



Overall, the current dynamics of the Eurodollar are somewhat detached from reality and the market's perception of signals from the ECB and the Fed can hardly be called adequate. A few years ago with a similar news background, the bears could force down prices by a few hundred points per day. Now the situation is different, so on the local correction I opened a buy deal with a close take-profit. However, at the first sign of the return of bearish sentiments, my plan is to return to sales.

RoboForex research department Stanislav Koval