After the FOMC monetary policy decision and Yellen’s press conference, the Fed made a staggering climb-down on its monetary policy. Has the Fed now got a credibility issue?

1. Weekly Outlook
Monday 21st March with Richard Perry, Market Analyst
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WHEN: Tue, 22nd March, 0930GMT
LAST: +0.3% (+1.2% core)
FORECAST: +0.3% (+1.2% core)
Impact: With a dearth of key market moving US data
this week the focus turns to UK inflation. The core
figure has been increasing in recent months and shows
signs of breaking the trend lower. Expectation of 1.2%
is in line with last month and this is would be more
evidence of the stability. With average weekly earnings
holding up and a tightening labor market, the signs are
positive for further recovery. The recent run higher in
sterling would be buoyed by stronger inflation and the
volatility will ramp up on the announcement, although
no change is expected.
Key Economic Events
Date Time Country Indicator Consensus Last
Tue 22nd Mar 09:00 Eurozone Flash Manufacturing PMI 51.3 51.0
Tue 22nd Mar 09:30 UK CPI (core) +0.3 (+1.2%) +0.3% (+1.2%)
Tue 22nd Mar 10:00 Eurozone German ZEW Economic Sentiment 5.9 1.0
Wed 23rd Mar 14:00 US New Home Sales 0.51m (+3.2%) 0.49m (19.2%)
Wed 23rd Mar 14:30 US EIA crude oil inventories +1.3m
Thu 24th Mar 09:30 UK Retail Sales (YoY ex-fuel) +3.3% +5.0%
Thu 24th Mar 12:30 US Durable Goods Orders (ex-transport) -0.2% +1.8%
Thu 24th Mar 13:45 US Markit Flash Manufacturing PMI 51.0
Thu 24th Mar 23:30 Japan CPI +0.1% 0.0%
Thu 25th Mar 12:30 US GDP (Q4 final) +1.0% +1.0%
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1N.B. Please note all times are GMT (and the US time shift to Daylight Saving Time), data source Reuters
Macro Commentary
Has the Fed now got a credibility issue? In the FOMC monetary policy decision and Yellen’s press conference, the
Fed has made a staggering climb-down on its monetary policy. The Fed has a dual mandate and that is to set
monetary policy with the aim of full employment and target inflation of 2%. For months we have been force-fed lines
about “data dependence”. However, in recent months we have seen the unemployment rate falling below 5.1%
(with labor force participation notably picking up) and more importantly now we are seeing traction in inflation (core
CPI above 2% and core PCE closing in at +1.7%). But we have now got the Fed cutting inflation expectations, so
questions need to be asked on their inflation forecasting and more importantly cutting end-2016 Fed Funds mid-
range expectations from 1.375% (i.e. 4 hikes) to 0.875% (i.e. 2 hikes). Yellen then spent the press conference
being concerned about international conditions (something they cannot actually control). I re-iterate, this is all in the
face of improving US data. Where is the data dependence? Also Yellen suggested that the strength of the dollar
was a factor impacting on monetary policy too. This all means that markets will now have to price for a weaker
dollar. But what if inflation continues to rise in the coming months? With the Fed behind the curve, this will mean
that markets will have to again begin to price for a more aggressive tightening. This doe not help market stability.
Must Watch for: UK CPI

2. Weekly Outlook
Monday 21st March with Richard Perry, Market Analyst
Foreign Exchange
The massively unexpected dovish move from the Fed has changed the game at least for the next few weeks.
The interest rate differentials coming closer together means that the dollar is now on a corrective path against
the major currencies. Yellen said that the “strength of the US dollar is transitory”, meaning that the Fed is
looking to pursue a policy that drives a weaker dollar. Despite ECB economist Praet’s suggestion on Friday that
the ECB could further cut the deposit rate, this should merely be a near term blip as the EUR/USD pair looks
set to pull back towards the range highs again. This would certainly not be putting a smile on Mario Draghi’s
face, but with the Eurozone economic indicators slowly picking up (Eurozone PMIs are again expected to tick
higher this week) there is an underlying euro strength now. Cable too could now be on a more positive near to
medium term path. In the wake of the dovish Fed, the Bank of England painted a more positive picture of the
UK’s own economic recovery (growth in private domestic demand and support for wage growth) despite the
Brexit threat. The selling pressure on Dollar/Yen could also give the Bank of Japan a decision to make as its
own move to a negative deposit rate looks to have bee hugely undermined. Already there have been
suggestions of the BoJ looking to intervene as the market dropped to multi-month lows below 111.00.
WATCH FOR: Lots of data to update on the Eurozone recovery on Tuesday with flash PMIs, German Ifo
and ZEW. UK inflation will drive sterling volatility as will retail sales. Us data is mostly housing based.
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FX Outlook
USD/JPY
Watch for: Breaking down with a close below
111.00 opens the downside
Outlook: The key support around 111.00 is
creaking on Dollar/Yen. In the wake of the
dovish Fed decision the support was broken on
an intraday basis but as yet there has not been a
closing breakdown. A close below 111.00 would
end the month long consolidation pattern and
result in the continuation move for the sell off.
This would then imply a move down towards
107.50 in the coming month. The next downside
support comes in around 110.00 and then
around 108.00. The momentum indicators also
suggest downside potential for the move. For
now though we wait for the confirmation.
Resistance is around 112.15/112.60 early this
week and expect rallies to be sold into.
EUR/USD
Watch for: The bull flag points towards further
gains this week.
Outlook: A dovish Fed is a bullish driver of
EUR/USD, especially as Eurozone economic
data continues to improve. The near term blip
lower from Friday is likely to find traders using
corrections as a chance to buy now as the
outlook seems to be suggesting pressure on the
February high and ultimately towards a bull flag
target of $1.1450 which is towards the top of the
long term range at $1.0450/$1.1460. Momentum
indicators are bullish and the technicals are all
pointing towards upside in the coming days.
Whether the euro has the momentum for an
upside breakout of the range remains to be seen
but once again the $1.1050/$1.1100 pivot has
been key.

3. Weekly Outlook
Monday 21st March with Richard Perry, Market Analyst
Equity Markets
Can equity markets now push on in their recovery now that the Fed has turned out top be unexpectedly more
accommodative in its monetary policy than had been previously expected? A weaker dollar should help to
support Wall Street as it will improve the translation of US foreign earnings. However, the impact on risk
appetite should also be felt positively, with the feedthrough of the beneficial impact on commodity prices (both
in base metals and oil). Looking at the MSCI World Index, there has been a rally of over 12% in global equities
since the bottom back in mid-February. The move is the biggest one month rally of the past few years, but the
move is now up to some significant technical resistance. A big 10 month downtrend looms overhead, whilst the
falling 200 day moving average is also a barrier. The chart of the MSCI reflects global equities are at a
crossroads now. Whilst sentiment in emerging markets should be helped due to the easing of the funding
pressures on their huge pile of US denominated debt, the major markets do not face such as bullish impact.
There is a strongly negative correlation between the strength of the yen and the Nikkei, and also the strength of
the euro and the DAX. This could mean that major markets feel the negative impact of the accommodative Fed
through the pressures of local currency strength. The reaction of the DAX in the day following the Fed was
sharp selling pressure even though Wall Street was pulling higher. There could be a relative strength play for
Wall Street. On the plus side though, remember that the strong oil price remains positive for equities.
WATCH FOR: Eurozone data releases on Tuesday will certainly be an impact on the DAX, whilst FTSE
100 will move off the UK retail sales data. US housing has tended to be supportive in recent months.
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DAX Xetra
Watch for: Volatile gains still are being seen
Outlook: The DAX remains a volatile market.
Looking at the technicals though shows two
massive bearish candles in the past couple of
weeks. One on the ECB day and one on the day
after the Fed, and both have been on the fears
of the euro strength. Still though the improved
risk appetite from a dovish Fed is helping to
usher the DAX higher and the rising 21 day
moving average which was a basis of resistance
on the way down has now become the basis of
support on the way up (currently c. 9710).
Overhead resistance remains in the band
10,122/10,165, with 9753 the support.
FTSE 100
Watch for: My concerns over the RSI once
again failing at 60 remain
Outlook: Wall Street may be pushing into
positive ground for 2016 as a whole, but the
FTSE 100 is still struggling to find the upside
traction. I am still concerned by the persistent
failure of the RSI up at 60 over the past 11
months and whilst this remains the case the bulls
will need to be wary. There resistance of the
December high at 6315 still looms overhead and
the bulls are having to fight hard for every point it
seems now. A minor correction would probably
be healthy after a 13% rally in recent weeks.
There is good support at 6036. The big
resistance remains the 6487 high from October.
Index Outlook

4. Weekly Outlook
Monday 21st March with Richard Perry, Market Analyst
Other Assets: Commodities & Bonds
The accommodative shift in Fed monetary policy should be positive for commodities. Gold performs well in a
negative real interest rate environment and with US inflation rising whilst the Fed appears to be reluctant to
raise rates, this is supportive for gold. It is strange then that the gold price has struggled in the past few days
since the Fed announcement. It is possible that the medium term technical tiredness could be catching up on
gold. However, the oil price is also a positive beneficiary from the Fed move, and with investor risk appetite
improving this should continue to be positive for oil. Breaking and holding above $40 on WTI is a strong move
for the bulls and is one which opens the key November high at $43.50. With lower than expected EIS
inventories, a date set for the OPEC/Non-OPEC meeting in Doha on 17th April and although an unexpected
uptick in the Baker Hughes has induced a minor correction it should just be a near term move.
An incredible move by the Fed has seen a flood back into bonds (both Treasuries and other sovereign debt). A
falling front end of the US curve will now be priced in the coming days. It is also interesting that the Japanese
10 year JGB has fallen to its lowest ever level on Friday, whilst the German 10 year Bund yield has also sharply
fallen back again having jumped higher following the ECB decision a couple of weeks ago.
WATCH FOR: The EIA oil inventories report is a driver of volatility on oil, whilst the strength of the
dollar is also set to have an impact across commodities.
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Gold
Watch for: Despite the positive reaction to the
Fed, the bearish divergences are still a concern
Outlook: With a dovish Fed now in place again,
fundamentals for gold should be positive, but the
technicals show a tired medium term trend. The
momentum indicators continue to bearishly
diverge, whilst the negative reaction of gold on
Thursday and Friday last week was somewhat
disappointing. The ongoing problem I have is
that divergences can take weeks if not months to
play out, and this could mean that a retest of the
$1283.50 high and possibly even towards the big
overhead resistance at $1305, but ultimately I
still see this as a tired trend and therefore I’m a
very cautious bull medium term.
Markets Outlook
Brent Crude oil
Watch for: The bullish recovery looks set to
continue to test $43.15/$46.50
Outlook: Corrections are being bought into as
the break higher on the oil price continues. On
Friday Brent crude hit its highest level since early
December and has retraced more than 50% of
the big October/January sell off from $54.05 to
$27.10. This now opens the 61.8% Fibonacci
retracement at $43.75 which is also the next
resistance band $43.15/$46.50. Medium term
momentum indicators remain very strong but
also show further upside potential. The key
reaction low is now in place at $38.30. Also,
having previously acted as the basis of
resistance, the rising 21 day moving average (c.
$38.20) is now the basis of support.

5. Weekly Outlook
Monday 21st March with Richard Perry, Market Analyst
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