By Jameel Ahmad, Chief Market Analyst, FXTM
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Markets are looking more optimistic as we head into the final stretch of the week with this probably being linked to a combination of indications, such as the FOMC Minutes that US interest rates will be left unchanged for longer than expected, optimism of a positive conclusion to a Greek deal and the Shanghai Composite Index attempting to regain the dramatic losses of recent weeks. Bearing in mind that the risks over a Grexit remain at elevated levels, there are still possible risks to the market sentiment ahead.
Regarding the FOMC Minutes release Wednesday evening – although the tone remains that the Fed is looking to raise interest rates later this year – international risks were highlighted and many are beginning to ease back their expectations of a US rate hike in September. International risks intensifying further would likely encourage the Federal Reserve to leave monetary policy unchanged. At the same time, the US economy is outperforming its peers and the Fed continues to be in a positon to raise rates before the overwhelming majority of central banks could even begin contemplating the idea of a rate hike.
When we speak about the health of the global economy, we are probably in an even worse position than we were this time last year. The pace of recovery in both Japan and Europe continues to be questionable, declining momentum in China is a running theme and the dramatic decline in the price of oil is hurting both those economies reliant on crude exports, and global inflation expectations. When you also consider that we had a further two global economic downgrades very recently, the Fed raising rates in 2015 would provide markets with a much-needed vote of confidence.
Who would benefit the most from the Fed leaving interest rates unchanged for longer? At this moment it would have to be Gold and emerging market (EM) currencies. The more downbeat comments from the FOMC has spared Gold’s blushes from further losses in the short-term and provided the platform for the yellow metal to recover some losses after encountering continuous downside pressure as of late. EM currencies would also benefit from any breathing space after having to deal with recent history repeating itself over the past week with the combination of a resumption of selling pressure on WTI, just as USD momentum appeared to be picking up speed. This was the exact same deadly combination that led to the emerging market currencies declining at a rapid rate in early 2015.
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