Fed’s rate decision impact
This past week saw increased volatility as the Federal Reserve predictively decided to maintain interest rates at zero percent. It was the 55th consecutive time that the Federal Open Market Committee met and agreed that the cost of money lent to banks should be free. This unprecedented period of easy monetary policy by the Federal Reserve is a sad commentary on the health of the U.S. economy. GFC forecasted the FOMC’s rate decision 5 days in advance via our new Twitter Feed! GFC invites you to follow us on Twitter for important market tweets and commentary. https://twitter.com/GeoFrontCapital
Inside the FOMC’s released statement they explained their rational for leaving interest rates unchanged, citing global economic instability, recent market volatility related to China’s contraction, and inflation levels below their preferred target of 2%. The only dissenting Fed vote came from Richmond Fed President Jeffrey Lacker who voted for a rate hike of 25 basis points. The near unanimous decision reflects just how worried the Fed is about a potential negative market reaction. We at GFC suspect the Fed is also concerned about the prospect of a strengthening U.S. dollar which would serve to exacerbate foreign capital flows coming out of Europe and into the U.S. The goal of successfully deflecting foreign capital flows into the U.S. dollar is conceivably the Fed’s #1 goal at this time. Rising interest rates would likely strengthen the dollar, make it harder for debtors to fulfill their financial obligations, and therefore contribute to an increase in domestic deflation.
As our readers are aware, GFC has maintained a bullish stance on oil for the last 3 weeks since it broke out above its downward sloping trendline. After spiking about 30% from the low, oil traced out a triangular consolidation pattern. Triangles are typically continuation patterns, meaning they break out in the direction of the prior trend which, immediately before this triangle formed, was up. As you can see in the oil chart below, oil broke topside out of the triangle on Wednesday and climbed to $47.69 before reversing. Often times when prices break out of important trendlines, they often revert back to the trendline to test the breakout’s validity.
Oil sold off after the FOMC rate decision and retested the trendline by forming an intraday low at $44.22, which is the precise location of the former triangle resistance line, which is now support. The support boundary of the triangle created a lot of support in the $43-45 range and this most recent low appears to be an ideal place for oil to continue rising toward $50 a barrel. If oil is able to close below $43.50, then our bullish interpretation would be invalidated.
Another commodity that GFC has a bullish outlook on is gold. We believe gold made an important bottom on July 20th at $1,071 an ounce. From this low, gold rallied almost $100 to $1,170. Over the past 3 weeks gold retraced about 2/3rds of this $100 rally and made as late last week resumed it’s climb upward from $1,099. Gold seems to like the Fed’s decision to keep the cheap money flowing as it climbed more than $25 in the wake of the FOMC’s rate decision. In the 4hr Chart you can see that Gold traced out an impulsive 5-wave Elliott sequence and is then declined in 3 waves into the $1,099 low. GFC believes gold is in a 3rd wave which is the most powerful wave and should draw gold significantly higher to over $1225.
Additionally, Gold created a bullish engulfing candle on the weekly chart and also of importance is the fact that MACD closed the week positive. Considering the wave structure and the prospect of a delayed Fed Rate hike into the foreseeable future, the prospects for gold to rise in the weeks ahead look promising. Near-term, gold may experience a slight retracement early next week, but GFC expects gold to climb much higher over the intermediate term.
The most volatile response to the Fed’s rate decision arguably occurred in the FX markets. The dollar initially sold off as expected immediately following the news. However, today the dollar rallied ferociously and looks poised to continue its surge. The Euro makes up over 47% of the US Dollar Index which is comprised of a basket of global currencies. Because it accounts for such a large share of the weighting within the index, it is often referenced as a reliable proxy for where the dollar is headed next.
The EURUSD has been consolidating slightly upwards for the last 6 months ever since it made a low at 104.62 on March 13th. The consolidation since then has been very ugly with no definable trend. Last month EURUSD made a high of 117.13 and sharply reversed. There is a potential that today’s price action signals the resumption of EURUSD’s imminent decline. Ultimately, GFC is expecting the Euro to fall below parity with the dollar and potentially much lower. If prices are able to close below the recent upward trendline it would signal that the next significant selloff in the EUR is underway.
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