Last week was a big Central Bank week for policy. The BOJ (Bank of Japan) offered nothing new but both the FED (U.S. Federal Reserve) and the BOE (Bank of England) gave the markets a bit of a shakeup.
Andrew Bailey, the Bank of England Governor, caused huge volatility addressing the issue of “Negative Interest Rates” in the content of the BOE Monetary Policy Statement, when it stated that all tools to deliver policy were on the table and it was stated that regulators were in the loop vis-à-vis implementation (if required) of negative interest rates. Initially the cable fell off the cliff but by the end of the day it had recovered. It has been a while since cable washed out both longs and shorts in the market, but I would say it had a damn good attempt of doing it last Thursday.
It is Jerome Powell’s press conference that I want to feature this week, not in huge detail just on a couple of points that I believe we should keep in mind moving forward.
So, here we go...
1. THE SOAPBOX:
IS THE FED OUT OF BULLETS... TRUE OR FALSE?
Last Wednesday, yet another Press Conference was given by Jerome Powell, the FED chair, this time on the back of the latest FOMC Interest Rate Decision and Policy Statement, “Dot Plot” and economic forecasts. As always it was billed as “Crucial”, “Eagerly awaited”, “Vital”, you name it, to give it greater importance, it was all quoted in the media ahead of the data release and press conference.
Did it live up to its billing?
Well, to be honest, not in my eyes. I thought it was a Jerome Powell very limp performance which, was big on rhetoric, but it was to a large extent a redundant performance. I say this, given that Powell had within 30 days prior delivered a keynote address at the Jackson Hole Symposium, which announced a major change in FED monetary policy.
Powell referred to the new FED policy of allowing the U.S. economy to run hot, and let inflation operate in excess of the long set in place inflation target of 2%. The new approach allowed, announced in Jackson Hole is a flexible approach based on average inflation.
It all sounds just wonderful and the market reaction, if you recall was huge. It is, however, all total bollocks. The Fed along with most G10 Central Banks, dream of 2% inflation. The Central Banks have tools to “cap” inflation but tools to generate inflation.... it’s all a dream!
During the press conference last Wednesday, Powell constantly re-enforced the message that the FED was delivering a strong consistent message on policy and that the people of America should recognize this.
Mmm; not so sure 90% of Americans know who Jerome Powell is, never mind recognize the style or type of message that he and the FED is attempting to deliver!
Without being too cruel, Powell was asked on a number of occasions during the Q&A what “tools” does the FED have left in the armory to use if called upon.
He never really answered the question, he muttered references to: -
- A Strong and Bold policy that the American people would understand.
- Forward Guidance... that's total bollocks anyway.
- More stimulus... what more QE?
- Negative Interest Rates – not on his watch!
He is hoping that the lawmakers in Washington will come to the table with fiscal stimulus next and I firmly believe that this is his “send in the cavalry” move because the FED is out of bullets.
Every tool the FED has only serves to create a bigger gap between the “Have’s and the Have not’s”. Remember the FED policy of crushing bonds and the USD push investors to the only area to achieve yield is in the Stock Market. Frankly, it looks like a bubble already, which cannot be sustained forever, and I think any more of the same from the FED will be like throwing gasoline on a fire. The only tool left is to buy stocks themselves and that will break all their rules. The FED got around Corporate Bond purchases by creating a stand-alone financial purchasing vehicle from which to operate, the same could no doubt be done to accommodate stocks BUT imagine the outcry!
So, in my mind, more of the same with policy would just make the rich richer and the poor poorer despite the crap that Powell utters about FED policies NOT creating a divide. Come on, how can FED policy NOT create a greater divide, the stock market is the ONLY PLACE for yield and 85% of stocks are owned by just 10% of Americans.
Unless the Central Bank God’s look down on the FED and magically come up with a policy so intuitive, inspiringly creative and unique in concept and delivery,
How this plays out moving forward remains to be seen. A sharp 20% correction in equities will have the lawmakers in Washington putting together a fiscal stimulus package faster than a rat can run up a drainpipe, but for now I think we drift.
As you can see from the USD Index Daily chart above, we are consolidating in a range from 92.50 thru 94.00. But, make no mistake as you can see from the big black arrow on the chart we are in a downward trend at the moment. Without doubt a break above 94.00 would give the bulls something to shout about, however, 95.50 (61.8% Fibonacci retracement) is the key level in my opinion that breaks the directional trend of late.
The biggest factor to consider in all of this is TRUMP. He is transactional, inconsistent, lacks discipline, has no understanding of how to bring about unity, his goals are to create confusion and uncertainty, basically a bully in every measurement of his persona and he is basically a loose cannon in every aspect of his Presidency. Apart from these traits he is just wonderful.
He can undue policy in a tweet, walk it back and add a few more comments to keep everyone guessing what the policy actually is. I do NOT think he will do anything to break the FED policy of ZIRP (Zero Interest Rates) and being the financial backstop for the S&P. BUT... you never know, he is liability at times.
If TRUMP pulls a TRUMP, the options for the FED are very limited.
So, at the end of the day, IS THE FED OUT OF BULLETS?... in my opinion YES; it’s TRUE.
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4. CLOSING THOUGHTS:
Finally, as usual…
Always remember longevity in Forex trading can only be achieved through trading with good RISK and MONEY MANAGEMENT, and above all set your position sizes in accordance with the size of your account and allow for some flexibility.
Finally, be GRATEFUL for your wins and COUNT THEM. Keep a POSITIVE MINDSET in play at all times, regardless of the market conditions.
The Pip Accumulator
BLOG VERSION: #381 FREE NEWSLETTER
DATE: 20th September 2020