The market has definitively abandoned the idea of a second consecutive Fed rate hike at the October meeting. According to the CME FedWatch tool, the probability of a rate increase in October is only 19%. Recall that recent FOMC speeches and the latest economic data do not point to an immediate continuation of tightening. The core personal consumption expenditures (PCE) index did not rise in August, the US labor market again showed disappointing results indicating a cooling, and the unemployment rate increased. Therefore, the most logical scenario is a pause.
Last week, one Fed official, John Williams, openly said the Fed should not rush to tighten monetary policy. After his remarks the market began to doubt an October rate hike, and subsequent information only confirmed those doubts. This week another Fed official, Beth Hammack, also spoke in favor of keeping rates unchanged. The Cleveland Fed president said the Fed has time to analyze incoming data and should not rush decisions on further rate steps.
Ms. Hammack also commented on the latest jobs report, saying the data are broadly consistent with recent trends. The Cleveland Fed chief noted that on average about 41,000 jobs were created per month over the past year, which is sufficient to maintain a stable labor market. As I expected, the benchmarks for the monthly number of jobs needed have been reduced. Perhaps not down to 40,000 per month, but they are no longer above 100,000 as a few years ago. However, that does not change the fact that the actual September nonfarm payrolls print was still three times below market expectations, and the strong August figure was revised down by 30,000.
Ms. Hammack also stressed that the September jobs report alone cannot be the basis for an October rate decision. The inflation report for September will be released later, and the FOMC will issue its verdict based on all the incoming data. Therefore, the market must wait for the September inflation print. If it shows a high reading, hawkish expectations will rise again and the dollar could strengthen.
Other articles to read:
Analysis of EUR/USD. October 7. In anticipation of FOMC minutes
A wave analysis for EUR/USD:
Based on my analysis of EUR/USD, I conclude the instrument remains within a global corrective trend segment A-B-C-D-E. If this assumption is correct, declines will continue toward targets below the low of wave C—1.1325. I treated this scenario as an alternative, and if not for the Fed meeting, it would have remained a reserve case. But the Fed surprised markets and left no option but a new wave of dollar buying. Purchases have continued for several weeks despite the absence of fresh supporting factors for the dollar. I would not open shorts in such a news environment and would instead prepare for a reversal.
A wave analysis for GBP/USD:
The wave structure for GBP/USD has become fairly clear but could become more complex. Charts show a distinct A-B-C corrective structure, which after the Fed meeting could transform into A-B-C-D-E. If that assumption holds, the pound will continue to decline toward targets below the 1.31 area near the low of wave C. However, completion of a similar structure in the euro could prompt the pound's structure to finish at any stage.
Core principles of my analysis:
1) Wave structures should be simple and comprehensible. Complex structures are hard to trade and often change.
2) If you are not confident about market conditions, it is better not to enter.
3) There is never 100% certainty about the direction; do not forget protective stop-loss orders.
4) Wave analysis can be combined with other analytical methods and trading strategies.