Investors are in mourning on Thursday after the Fed failed to overdeliver at their policy meeting on Wednesday, despite supporting their policy framework changes with a significant commitment on interest rates.
The problem with raising expectations to such a significant degree heading into the meeting is that when the Fed does deliver an extremely dovish statement - and it very much was that - everyone is left feeling a little underwhelmed, even disappointed. But there is absolutely no reason to be so.
The central bank has committed to keeping rates low until 2023, or when they have moderately exceeded 2% for some time. While vague, given the central banks inability to even hit 2% for a long time, we could feasibly be looking at low rates well beyond when they currently envisage. This is far more dovish than is being perceived.
What we're basically dealing with is a market that was very short dollars and desperately in need of a bazooka moment in order to continue to justify it. This was extremely dovish but there was no bazooka. The unwinding has begun and the dollar may now be headed for a correction after months of selling.
Sterling slips as BoE ponders negative rates
The Bank of England also didn't make any bold promises on further easing, although it is widely expected in the coming months, with the bank on course to complete its asset purchases - totalling £745 billion - around the turn of the year.
The killer announcement for sterling was the acknowledgement that they had been briefed on how a negative rate could be implemented effectively, with the once anti-negative rate central bank seemingly edging ever closer to adopting one. I'm still sceptical about the actual benefits of such a policy but it seems to be where we're headed and the pound took a hit as a result.
The key thing for the central bank is the sheer amount of uncertainty around the outlook. Not only is it making assumptions in an ever-evolving Covid reality but it also has the prospect of no-deal Brexit to contend with. That was not its base case in August but it did say it would explore it further in November, at which point the negotiations should have concluded and policy makers will have a better idea of what they're deal with.
Oil risks tilted to the downside
Oil prices are edging higher again today, looking for a third consecutive winning day after EIA reported a larger than expected drawdown on Wednesday. This comes a day after API reported a much larger decrease, although that didn't seem too detrimental. This very much looks like a corrective move though, aided by the large number of shut ins as Hurricane Sally arrived in the Gulf.
The longer-term outlook is still concerning, with IEA and OPEC this week lowering their growth forecasts, as Covid continues to wreak havoc on the global economy and as we head into a very testing winter. OPEC+ is unlikely to make any changes to output after the joint committee review today, given the state of the current environment and downside risks to the outlook.
Gold hanging in there after Fed disappointment
Gold is hanging on in there but the near-term risks are very much to the downside. The yellow metal rallied into the Fed meeting and those positions quickly unwound as it became clear that the bazooka wasn't making an appearance. The Fed probably lived up to the lower end of expectations but all that gets you is a healthy dose of profit taking.
With gold failing to overcome $2,000 once again, it may be looking a little bleak in the near term, with the path of least resistance possibly below. Suddenly $1,900 is looking a little vulnerable, with a dollar correction also potentially on the cards. It's struggling to get going but if it can break the August highs, it may really take off.
Related: Can Fed Live Up to Expectations?