The US Dollar may rebound as a status-quo FOMC policy statement clashes with a recent dovish shift in financial markets’ Fed interest rate hike expectations.
Talking Points:
FX Markets to Look Past European News-Flow, Focus on FOMC Outcome
US Dollar to Rise if Static Fed Statement Clashes with Dovish Market Views
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A quiet economic calendar in European trading hours is likely to see traders looking ahead to what is arguably the week’s most significant bit of scheduled event risk: the Federal Reserve monetary policy announcement.The rate-setting FOMC committee is expected to deliver a final $15 billion “taper” of asset purchases, ending the QE3 stimulus program. The probability of a surprise extension seems overwhelmingly unlikely. That means the announcement’s market-moving potential will be found in guidance for the timing of the first subsequent rate hike inferred from the accompanying policy statement.
Recent weeks have witnessed a moderation in the post-QE3 Fed tightening outlook as global slowdown fears encouraged speculation that the central bank will want to safe-guard the US recovery from knock-on effects of weakness elsewhere by delaying normalization. Indeed, Fed Funds futures now reveal priced-in expectations of a rate hike no sooner than December of next year, far later than prior bets calling for a move around mid-year.
A change in the FOMC statement reflecting renewed concerns about persistently low inflation would validate this shift, weighing on the US Dollar. Alternatively, a restatement of the status quo would hint the markets’ newfound dovish lean has over-reached, offering lift to the benchmark currency. Considering the Fed’s steady hand through the first-quarter slowdown in US economic performance, the latter scenario seems more probable. We are now short EURUSD and long USDCHF.
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