USD range-bound ahead of FOMC

Forex News and Events

FOMC Time

Traders globally will be singularly focused on the FOMC meeting this afternoon. Given the importance of this event we anticipate FX markets will shift into tight ranges. The market is currently pricing in a September rate hike (approx 70%). With no press conference or new projections released it will be the statement language in terms of forward guidance that the market will be watching. On this we anticipate the Fed to remain cautiously optimistic (dont expect any significant change). While June retail sales and consumer confidence data disappointed, the overall growth trend, highlighted by a solid durable good read, indicates that 2Q GDP will accelerated above 3.0% (Thursday release). That said weaker commodity prices have damped expectations for inflation to increase and could weigh on Feds potential delivery date. We suspect that markets are too focused on the Fed “lift off” rather than the pace of rate hike cycle. We expect a 25bp FF hike in September but gradual tightening, with plenty of balanced statements, moving forward. This will keep the US yield curve in a flatter shape limiting the upside in USD against G10 currencies. However, EM currencies have a higher sensitivity to US rate movements combined with mounting growth issues, soft commodity prices and high debt load should remain weak against the USD. We remain constructive on the USD based on policy led divergence however, trades will have to remain patient for any significant FX gains.

Japan retail sales collapse again:

“Japan June retail sales came in yesterday at a disappointing -0.8% m/m well below the May figure that printed at 1.7% m/m. There is now a growing concern about the efficiency of PM Shinzo Abe’ policies. He is currently failing to end up a period of twenty years of deflation for which he has been elected. Indeed, deflation has been happening for the last twenty years and Shinzo Abe is still trying to stimulate the economy through its Abenomics policy which consists in monetary and fiscal stimulus and structural reforms. It has not provided the desired effects and earlier this month the Bank of Japan has cut its GDP growth forecast to 1.7& from 2.0% as well as the core inflation target for 2015 went to 0.7% from 0.8%. The key for growth is confidence in the economy and for the time being Shinzo Abe has been unable to increase consumer spending despite massive quantitative easing. We now wonder about the true success of those magical arrows. Furthermore, last year sales tax hike went from 5% to 8% and simply destroyed consumer spending and therefore retail sales. Ironically, giving confidence to Japanese people while punishing their purchasing power was all but a strategic move leading to sustainable growth." Yann Quelenn - Market Analyst

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