Fed Hastens, BoE Hikes, ECB Balks

Fed's decision to double its tapering from $15 bln to $30 bn to signal faster rate hikes for 2022 than the markey expected? The answer lies in the chart below. And more on what we did with our WhatsApp Broadcast Group after the FOMC statement and before Powell's press conference.

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The chart shows how the red graph of OIS curve (Overnight Index curve) disagrees with the Fed's rate hike expectations. Said differently, the red graph links the red dots of median projections for the fed funds rate according to the market, versus the yellow dots, linked by the median projections from each FOMC member. Thus, the red graph for 2023 is substantially lower than the yellow graph, meaning the “market” expects between one and two rate hikes in 2023, versus three rate hikes by the median of FOMC members (yellow graph). 

The reason markets assert the US economy cannot handle that much tightening is due to the taxing nature of inflation on consumer demand. As opposed to demand-driven inflation, which lift up prices thanks to broadening strength in incomes and consumption, supply-driven inflation is mainly a manifestation of shortages and higher energy costs. Even if some of the inflation ends up remaining (sticking), the US consumer simply cannot handle five of six rate hikes. 

Both of the Bank of England decision to hike rates in the midst of a deteriorating virus situation and the ECB's decision to taper in Jan were a case of central bank's attempt to not be left in the inflation curve. The BoE rate hike's short-lived positive impact on GBP clearly indicate that decision was mainly a ceremonious step to acknowledge inflation. 

Minutes before the Wednesday FOMC decision, we informed our WhatsApp Broadcast Group, we shorted Nasdaq – a trade that was later given up shortly before we launched a long in XAUUSD at 1771, targeting 1784 and later 1792. The gold trade was also complemented with long XAGUSD at 22.05 targeting 22.35 and opened another trade subsequently. The signals basis we used for entering metals during the FOMC/Powell noise included (gold/silver structure, XAUUSD candle, XAGUSD support and VVIX/VX).