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Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.
 Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work, and whether you can afford to take the high risk of losing your money.

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What will the Fed do next?

As the latest FOMC meeting looms, we look at the current state of play in US economic data, and examine the current breakout in the dollar index.

Chris Beauchamp

Chris Beauchamp
Chief Market Analyst, London

Publication date : 2018-04-30T13:20:48+0100

Federal Reserve
Source: Bloomberg

This week’s Federal Reserve (Fed) meeting is not expected to be a blockbuster, but it will shed further light on a central bank that continues with gradual tightening even as it sends a clear message that above-target inflation remains acceptable.

Fed Funds Futures currently suggest a 47.6% chance of four rate hikes this year. We’ve already had one, so at present three more would carry the interest rate to 2.5%. US growth was 2.3% for the first quarter (Q1) according to initial reports, and while this is slightly weaker, it remains above the trend. As a result, the Federal Open Market Committee (FOMC) can stick to its optimistic view of the situation overall. Core inflation has strengthened as well, breaking above the 2% level for the first time since early 2017.

Federal Reserve meeting

Everything you need to know about the Federal Reserve’s FOMC announcement – including when it is, and why it’s important.

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There are two factors that will continue to bother the FOMC. One is the possibility of a strong move higher in inflation thanks to the tax cut plans enacted by the White House. Jerome Powell’s predecessor, Janet Yellen, was already sounding a warning on the merits of engaging in more accommodative fiscal policy even as the economy improved - ‘counter-cyclical’ policies as they are known - and the continued increase in the Federal budget deficit will also concern other Fed members.

The other big unknown is the impact of trade wars. This poses the biggest risk to economic growth, since a full-blown trade war would make itself felt in consumer spending, employment figures and wage data. For now, the situation has calmed, but there are still plenty of elements that need resolving.

Despite a trimming of short positions over the past few weeks, the overall market remains significantly net short on the US dollar (USD). The latest bounce has a whiff of short-covering about it, but with the overall market still around $20 billion short of the greenback, the rebound in the price may be brief.

Last week saw the US dollar index break the downtrend line that has held since the end of December 2016. If this marks the beginning of a significant move then we would look to $91.93 and $92.75 as near-term targets, with the 2017 peak at $94.93 above this. A push back below the trendline would need a close back below $90.81, and then target $89.71 and $88.12.

US dollar index

US dollar index

US dollar index

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Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money. 

Professional clients trading spread bets and CFDs can lose more than they deposit.

Options and futures are complex instruments which come with a high risk of losing money rapidly due to leverage. They’re not suitable for most investors. Before you invest, you should consider whether you understand how options and futures work, the risks of trading these instruments and whether you can afford to lose more than your original investment.

Trading stocks and shares ‘on margin’ within a US options and futures account – meaning that you only finance part of the cost of acquiring a position in a security – carries additional risks over buying securities on a fully funded basis and may result in losses exceeding your original investment. Trading on margin will also result in additional costs to you as the investor and any securities purchased using margin may be held as collateral by the lender, restricting both your rights as shareholder, and your ability to use the securities until the margin trade is closed. You should familiarise yourself with these risks before trading on margin.

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