Taking a break from our non-stop Brexit coverage, we want to highlight a key development that on the US monetary policy front that may mark a significant shift for markets heading into next year.
In a marked shift from the previous “party line,” two Fed members came out with relatively cautious assessments of the US economy Friday morning. As my colleague Fawad Razaqzada noted:
The Fed’s Deputy Chairman Richard Clarida said he is seeing evidence of a slowing global economy and that interest rates were “close to the neutral range,” although still rejected suggestions that the central bank has gone too far, too fast, meaning that a December rate hike is still looming. Fed’s Robert Kaplan, meanwhile, also acknowledged that global growth will be a little bit of headwind and that it may spill to the US economy.
These (potentially coordinated?) comments suggest that some members of the Federal Reserve may be second-guessing the central bank’s informal once-a-quarter schedule for interest rate increases, especially as we move into 2019.
As Fawad notes, a December rate hike is still the odds-on likely outcome, but some traders are even calling that assumption into question. According to the CME’s FedWatch tool, Fed Funds futures traders are currently pricing in a 69% chance of an interest-rate increase in December, down slightly from 76% last week and 79% last month. Notably, the sharp 26% drop in US oil prices over the last six weeks may take a bite out of inflationary pressures (and thus the Fed’s urgency to raise rates), even if the central bank ostensibly “looks through” changes in energy and food prices.
USD/JPY Technical View
As of writing, the US Dollar Index is set for its biggest one-day fall so far this month and USD/JPY is seeing particularly strong selling pressure. After failing to make a new high above October’s peak near 114.50 last week, the pair has rolled over and its bullish trend line off the March low.
Of course, this trend line saw a prominent false breakdown in late October, so we’re hesitant to automatically declare the established uptrend over even if we close Friday’s trade below it. Nonetheless, the bullish tide in USD/JPY is showing signs of shifting heading into a holiday-shortened week for US traders.
Source: TradingView, FOREX.com