Confidence in the global economy received another blow last night after the Federal Reserve disappointed market participants by refusing to raise interest rates, leaving US rates unchanged. While expectations over whether the Federal Reserve would pull the trigger in September had deteriorated following the recent turmoil in the financial markets, there was still optimism that the US economic data was robust enough to warrant an interest rate rise, and that this would have provided confidence in the global economy with a huge boost.
The Federal Reserve’s decision and lack of commitment towards when it will actually begin raising US rates is going to greatly threaten USD investor appetite, meaning further pressure will be added to both the Bank of Japan (BoJ) and European Central Bank (ECB) to add further stimulus and prevent investors from purchasing their currencies. It also appeared that the Federal Reserve swerved away from their previous commitment that a rate hike would be data dependent, meaning that global developments are a major concern for the US central bank and that the USD will now be exposed to pressure each time fears over global growth resurface.
The indication from the Federal Reserve that global economic weakness played a major factor in delaying a US interest rate rise strongly weakens the possibility of an interest rate rise at all this year. Global growth concerns are a reoccurring theme as current suggestions strongly point towards economic momentum in China continuing to slow even further next year. Both the Bank of Japan (BoJ) and European Central Bank (ECB) are going to find themselves under increasing pressure to reinvigorate economic momentum, and the emerging markets remain vulnerable to further weakness. The currencies of the emerging markets failed to bounce as strongly as some would have hoped as the Federal Reserve left interest rates unchanged, indicating that it is depressed commodity prices and slowing trade from China that are the major threat to sentiment towards these currencies rather than capital outflows that have already started taking place.
Gold
Advertisement
The USD weakness following the interest rate decision provided positive momentum to Gold and allowed the metal to climb to a two-week high at $1134. Hesitance from the Federal Reserve to begin raising US interest rates improves the prospects for Gold, however I do think that expectations need to be pushed back beyond this year for the metal to truly rally and regain losses from early this year. There are clearly ambitions from the Federal Reserve to carry out their repeated pledge throughout the past year to begin raising US interest rates in 2015, which is why I am not quite yet bullish on Gold.
WTI
WTI failed to gain momentum despite the USD weakness last night, which I think is linked to the Federal Reserve outlining global growth concerns as a major reason behind US interest rates being left unchanged. While the commodity managed to breakout of its wedge pattern earlier this week on the surprised decline in inventories from the United States, an incredible oversupply in the markets remains and will limit how high WTI can rally. Not only will the aggressive oversupply limit gains for WTI, but global growth concerns will lead to increased expectations that demand for the commodity is going to reduce, and this will act as a major catalyst for the price of WTI to remain depressed.
Advertisement
GBPUSD
The GBPUSD has rallied strongly over the past couple of days, with the gains in UK wage growth providing investor sentiment towards the Pound with a huge boost. The advance in UK wage growth raised investor sentiment because this will increase optimism that this will be passed onto inflation pressures and lead to an improvement in UK inflation data moving forward. The GBPUSD is technically looking very positive, with the pair surpassing its 200, 100 and 50 Moving Averages over the previous two days with this improving the prospects of the GBPUSD carrying through its recent gains into next week.
Follow Jameel on Twitter @Jameel_FXTM
For more information please visit: ForexTime
Advertisement
Add a comment
