April FOMC minutes: Brexit concerns

18 May, STO, Limassol –  Back in March, Federal Open Market Committee policymakers debated about April interest-rate hike, with a few officials leaning against such a move since it could send a wrong signal and others arguing that it might be warranted.

In today’s FOMC minutes announcement this could be clearly seen from the following section: 

“Several expressed the view that a cautious approach to raising rates would be prudent or noted their concern that raising the target range as soon as April would signal a sense of urgency they did not think appropriate.” 

More recently at the conclusion of its April 26-27 meeting in Washington, the FOMC has left its target range for the federal funds rate unchanged at 0.25% to 0.5% unchanged since December rate hike, but updated its policy statement by removing a reference to “global economic and financial developments” as an ongoing risk.

Now, Brexit risks are what keeps the Committee up and worried.

Although growth in real gross domestic product (GDP) appeared to have slowed, the Committee acknowledged that labor market conditions improved further in the Q1 of 2016. In addition, financial market conditions have also improved, with investors appearing to respond to Fed communications and to somewhat better than expected data on foreign economic activity. Risk sentiment has also eased, accompanied by a decline in market volatility and higher crude oil prices.

Several FOMC members judged that the risks to the US economic outlook were approximately balanced. Participants indicated that their assessments of the medium term economic outlook had not changed significantly since March and discussed a number of factors suggesting that the apparent softness in spending during the Q1 was unlikely to persist. Most pointed, again, to the steady improvement in the jobs market as an indicator that the underlying pace of economic activity had likely not deteriorated as much as was suggested by the recent US data on spending and production.

However, others suggested that they continued to see downside risks either because of concerns that the recent slowdown in domestic spending could persist or because of prevailing concerns about the global economic outlook. Showing that the Committee appears to be divided.

Current transitory factors may not fully explain the weakness in consumer spending or the broad-based declines in business investment in recent months.

“They saw a risk that a more persistent slowdown in economic growth might be under way, which could hinder further improvement in labor market conditions”  – FOMC Minutes

Supertradingonline STO 10-percent campaign banner-Moreover, the Committee has expressed their concerns that global financial markets could be sensitive to the upcoming Brexit referendum on Thursday, 23 June or to unanticipated developments associated with China’s management of its exchange rate.

Lastly, “some members expressed concern that the likelihood implied by market pricing that the Committee would increase the target range for the federal funds rate at the June meeting might be unduly low,” April FOMC minutes said.

Overall, FOMC members appear to be divided on their opinion on US economic outlook in the April FOMC minutes and with the next FOMC meeting on June 14, just a week before the Brexit referendum, expectations for a June interest hike could be considered as extremely low.

EURUSD post April FOMC minutes

Despite somewhat mixed April FOMC minutes, EURUSD continues to trade lower driven by the open door for possible June rate hike (despite low probability) but dragged by technical following the break below of the upward sloping weekly trend line and 50 MA.

EURUSD after April FOMC minutes announcement EURUSD after April FOMC minutes announcement (click to zoom)

An immediate support level falls on Fibonacci 76.4% retracement level at 1.1220, the low of 22 Apri. Should Euro brake below the 1.1220 level, subsequent support could be expected at Fibonacci 61.8% retracement level at 1.1450 and then 1.1100.

Meanwhile, potential resistance levels are located at 1.1280, 1.1340, and 1.1380 respectively.

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