Hawkish Fed Monetary Policy Statement Triggers Volatile Response in Forex, Commodity Markets

The key story last week and the main market driver was the Federal Open Market Committee’s statement on Wednesday, October 28.

The Fed left kept its benchmark interest rate unchanged as expected, but it also surprised investors by making a direct reference to its next meeting in its statement.

“In determining whether it will be appropriate to raise the target range at its next meeting, the committee will assess progress – both realized and expected – toward its objectives of maximum employment and 2 percent inflation,” it said.

The Fed also dropped a warning on global economic slowdown, a step which some believe, brings the central bank closer to a rate hike. The hawkish Fed statement raised the probability of a rate hike in December to 50 percent, up from 30 percent before the statement, according to the Fed Funds futures contract.

The U.S. Dollar rose initially against a trade-weighted basket of foreign currencies on the news. The move was strong enough to take the dollar back to its highest level since August 10. Dollar-denominated December Comex Gold and Silver broke sharply on the news to finish the week lower.

The Euro broke sharply against the dollar because of the hawkish Fed statement, however, weaker-than-expected U.S. economic data and friendly Euro Zone inflation data helped the single-currency gain back most of its earlier losses. The threat of additional stimulus from the European Central Bank in December, likely prevented the Euro from posting a gain for the week.

Directly affecting the Euro was the news from Eurostat that inflation in the Euro Zone returned to zero in October from September’s -0.1%.

The week began with the U.S. durable goods report showing an unexpected decline. Core Durable Goods Orders were down 0.4% versus a 0.0% estimate. After the release of the Fed statement, the U.S. reported that preliminary GDP rose 1.5%, slightly below the 1.6% estimate. Investors were surprised, however, by the 2.3% decline in New Home Sales. The market had priced in a reading of +1.1%.

The week ended with Personal Spending and Personal Income posting disappointing readings of 0.1%. Investors were looking for gains of 0.2% respectively. Revised University of Michigan Consumer Sentiment also failed to meet expectations.

A surprise announcement by the Bank of Japan triggered a reversal to the downside by the USD/JPY. The BoJ decided not to expand its massive stimulus program despite cooling inflation in the world’s third-biggest economy.  Influencing the central bank was a report that showed the core consumer price index, which includes oil products but excludes fresh food prices, dipped 0.1 percent in September from the year-ago period. This was worse than trader expectations for a 0.2 percent annual gain.

After trading lower at the start of the week, December Crude Oil futures rebounded at mid-week, posting a 6% gain for the day. Numerous reasons were given by traders and the media for the sharp gain including a “big” algorithmic trade, the weekly inventories reports, and a hawkish Fed statement. Technical traders said oversold indicators and extremely light volume fueled the rally. 

The week ended with a strong finish with crude prices bolstered by the news that the U.S. oil rig count fell for a ninth straight week, indicating that crude production could decline in coming months. Prices were also underpinned from separate data showing U.S. oil output in August fell.

According to oil services company Baker Hughes, U.S. oil drillers removed 16 rigs in the week ended October 30, bringing the total rig count down to 578, the least since June 2010.

December Natural Gas futures reached its lowest level since 2012. The week started with the futures contract dropping nearly 10 percent as supplies continued to rise toward record levels amid expectations that there will be a warm start to winter in key demand areas.