Daily Market View: Risk-Off Markets As Fed Decision Looms

1-Minute Market Rundown

• Markets struck a risk-averse tone yesterday, with equities slumping once more, as recession worries continue to dominate
• In FX, the dollar consequently resumed its recent rally, with all other G10s continuing to face rather stiff headwinds
• Looking ahead, this evening’s FOMC decision highlights today’s docket, with another 75bps hike expected, along with guidance for a move back to 50bps increases from September
  
  

Risk-Off Markets As Fed Decision Looms

Dress codes in the City are a fluid thing, it seems.

Typically, as most will know, I sport a suit and tie (half Windsor knot, for those curious). Rocking up to a meeting yesterday, I was greeted by my good friend wearing a crumpled shirt and desert boots – I’ll leave you to judge which, if either, is more appropriate.

Crumpled, whatever dress style you prefer, is an apt way of describing the price action in equities yesterday. Ahead of this evening’s FOMC meeting, stocks slumped across the board – we have plenty of narratives upon which we can pin this move, however I reckon the toxic combination of rapidly tightening monetary policy and growth slowing faster than expected is probably behind the move.

I wouldn’t be at all surprised to see the downside in riskier assets extend into, and especially after, the Fed meeting. A 75bps hike, along with guidance for a more modest 50bps hike in September, are our expectations, however the market is likely to take this as a relatively hawkish message from policymakers; bad news indeed for risk.



In any case, the impact of rate hikes is already being felt. After dismal (contractionary) PMI surveys from both the eurozone and US last Friday, the latest US consumer confidence figures out yesterday showed that consumers are almost as pessimistic about the economy as businesses.

According to the Conference Board, confidence fell to its lowest level since last February, falling for a third month running in July. You can argue whether or not we’re talking ourselves into recession at this point, but all the data is only pointing one way.



What do you want to own in that environment? Gold, maybe. The dollar, certainly.

The greenback rallied back above 107 yesterday – taking cable to test 1.20, and the EUR towards 1.01 in the process – with the bullish trend resuming after a couple of days of rather lacklustre price action. It is not only worrying growth data and a hawkish Fed pushing the dollar higher, but corporate month-end demand (today is spot value) is likely playing a role too.



So, we move into Fed day. I feel like this is broadly a repeat of last time, with policymakers wanting to avoid any sort of unwarranted loosening of financial conditions. Therefore, the least they can do is a 75bps hike, while guiding towards a slightly more modest 50bps hike in September.

Today's Economic Calendar

Markets This Morning (at 6am, London time)

I'd love to hear your comments, questions or suggestions. You can reach me on email at michael.brown@caxtonfx.com.

About the Author
Michael Brown is Head of Market Intelligence at Caxton, leading Caxton’s analysis, forecasting, and thought leadership within all areas of financial markets. He provides regular cross-asset market commentary and analysis, along with insight on market-moving macroeconomic events, being regularly quoted in national and international media. In addition, Michael leads on the inclusion and implementation of market research into Caxton’s data-led sales and marketing process. Away from Caxton, Michael is currently pursuing an Executive MBA at Cranfield University.