The Wall Street slumped to a 15-month low after the FED statement as we expected raised rates by a quarter. There was a downward shift in the dot plot with one hike removed from 2019. Now the Committee expects to hike twice in 2019, one more time in 2020, and then to remain on hold in 2021. In my view, weaker than expected macro data in the United States or major global economies could derail further rate hikes in 2019. The excess volatility in commodities, stocks and forex could also cause the Fed to pause.
James Knightley, Senior Economist at ING, points out that despite the Federal Reserve increased rates for the fourth time during 2018, with growth headwinds intensifying and market tensions rising, it will tread a more cautious path in 2019.
“At the same time concerns about trade tensions, weaker external demand and the resulting hefty declines in the stock market added to the sense of tougher times ahead. This will mean that the Federal Reserve will take a more cautious, data dependent approach to policy decisions next year.”
In Asia, Hong Kong’s Hang Seng retreated 1 percent, in Japan Topix and Nikkei225 Stock Indices plunged more than 2.5 percent entering a bear market. The Japanese central bank offered little hawkish or dovish surprises by keeping its short-term rate target at minus 0.1 percent
On the Lookout: Reuters reports that the World Bank is weighing in on US-China trade relations, noting that they expect China’s economic growth to slow to 6.2% in 2019. The World Bank said that while China continues its trade talks with the United States, it should increase its efforts to address trade partners’ concerns over intellectual property protection and technology transfers. Australia Unemployment Rate s.a. came in at 5.1%, above forecasts (5%) for November, and New Zealand Gross Domestic Product (YoY) came in at 2.6% below forecasts (2.8%) in 3Q. In the United Kingdom, retail sales (MoM) registered at 1.4% above expectations (0.3%) in November.
Trading Perspective: European markets are trading in the red, while in currency markets USD is under pressure.
EUR/USD: Bulls took the control in early European trading as the pair managed for a clear break above 1.1425. Euro got a boost after the decision that EU will not punish Italy on budget issues and lower yields in the US.
GBP/USD: The pair extends gains after stronger than expected retail sales numbers in the UK. Currently, it is trading at the highs of the day, just above 1.27. GBPUSD is in the short-term bullish momentum as it trading above all the major moving averages, a clear break of the round 1.27 will open the way for 1.2850 area. Traders will be cautious ahead of the UK central bank decision. Bank of England is expected to maintain status-quo amid the political deadlock over Brexit and might turn out to be a non-event for the market.
USD/JPY: US dollar broad-market weakness, send the pair down to 111.70 area breaking the 100-day moving average signalling more USD supply. 111.60 is a major support, and a break below will cancel the recent bullish trend. On the flipside, 112.60 yesterdays high is the immediate resistance. BOJ interest rate decision failed to inspire investors, so global risk aversion will drive the price today as no market-moving news is expected from the US.