Actual Investments & Pending Orders
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Clear Vote Of Confidence
The Fed's statement is clearly a vote a confidence for the economy because not only did the Fed fail to share the market's concern about low inflation but it went one step further by upgrading its assessment of the labor market. The Fed no longer sees "significant" underutilization of labor-market resources and instead acknowledged the improvements including solid job gains and a lower unemployment rate. In addition, there was no mention of the slowdown in global growth hitting the U.S. economy.
Although the Fed could have waited until December to sound more upbeat about jobs, there's a good chance policymakers wanted to take advantage of the recent decline in rates. The Fed did an excellent job of smoothing the market's reaction to the end of QE by outlining its protocol well in advance and now it is doing the same by slowly upgrading its assessment and preparing the market for a rate hike next year. While the Fed preserved the "considerable time" language in the FOMC statement this month, come December, that line could be dropped as well.
Reset Rate-Hike Expectations
Looking ahead, the trade in the FX market still centers around policy differentials. Wednesday's decision resets expectations for a mid 2015 rate hike by the Fed. In contrast, more easing is expected from the Bank of Japan and the European Central Bank. Later Wednesday evening, the BoJ was widely expected to admit that it will take longer to reach its inflation target, which should lead to further weakness in the yen. While we have been looking for long-term dollar strength for some time, we are now also looking for short-term gains, all of which plays into our new calls for 1.24 EUR/USD and 110 USD/JPY.