Fed preview: Upward revision of 2019/20 interest rate forecast could yield USD rally

Omkar Godbole FXStreet Contributor

The Federal Open Markets Committee, under the leadership of Jerome Powell, is likely to raise interest rates by 25 basis points and reaffirm the plan to gradually reduce the size of its balance sheet.

Expectations are fairly high that Fed will likely revise higher the 2018 dot plots to four rate hikes. Many believe this will be a hawkish outcome, although the greenback says otherwise...

Dollar index weekly chart

Source: Netdania

The last three doji candles indicate the investors are not particularly impressed by the talk of possible upward revision of the 2018 interest rate forecast.

This is because faster Fed rate hikes in the short-term would only push the Fed closer to the ceiling - new normal or long-term neutral rate of 2.75 percent. (Back in 2012, the rate stood at 4.25 percent). Hence, the resulting rally in the greenback could turn out to be a bull trap. The dollar index may face rejection at the descending trendline resistance and resume the sell-off.

However, the greenback will likely cut through the descending trendline resistance seen around 92.80 and test the 200-weke MA of 94.29 and the 10-year could break above 3 percent in a convincing manner, if the Fed pushes up its forecast of the long-term neutral rate (revises 2019/20 interest rate forecasts higher).

Also, investors could begin pricing-in a higher long-term neutral rate if the Fed focuses more on the inflationary impact of the trade wars.

Hawkish scenario

Fed revises higher its 2019/20 rate forecasts and/or focuses more on the inflationary impact of the trade wars/US protectionist policies.
Fed keeps long-term rate forecasts unchanged, but revises higher its 2018 dot plot to four rate hikes and mentions upside risks to inflation on account of trade wars, thus forcing markets to price-in the possibility of an upward revision of the neutral rate in the near future.

Dovish Scenario

Fed revises higher the 2018 interest rate forecast to four rate hikes as expected and uses strong words to mention downside risks to GDP due to trade wars.
Fed keeps 2018 interest rate forecast unchanged, uses strong words to mention downside risks to GDP due to trade wars.

Author

Omkar Godbole

FXStreet Contributor

Omkar Godbole, editor and analyst, joined FXStreet after four years as a research analyst at several Indian brokerage companies.

GBP/USD hits multi-week tops around 1.3560

GBP/USD gathers fresh steam and advances to new three-month peaks near the 1.3560 zone on Friday. Cable’s sharp move higher comes after three daily drops in a row and follows the increasing selling pressure hurting the Greenback.

EUR/USD pops to fresh two-month highs, targets 1.1600

EUR/USD advances markedly, revisiting the upper 1.1500s for the first time since mid-June. The pair’s sharp uptick comes on the back of a strong retracement in the US Dollar amid BoJ intervention chatter and despite steady uncertainty in the Middle East.

Gold picks up pace, approaches $4,400

Gold rebounds toward the $4,400 mark per troy ounce on Friday, reversing the previous day’s pullback. The precious metal’s recovery comes as fresh and intense weakness keep weighing on the US Dollar, while traders keep assessing easing expectations of an imminent Fed interest rate hike and the situation from the Middle East.

Pi Network Price Forecast: PI extends consolidation as bulls eye $0.10

Pi Network (PI) price holds steady on Friday, maintaining a consolidating tone for three consecutive days. Mild retail strength in the PI token remains stable, with Open Interest above $9 million, while social buzz eases. PI token’s technical outlook is mixed, as bearish momentum wanes to neutral, with bulls eyeing the $0.1000 psychological level.

Weekly focus: Some relief in US inflation concerns

Actual inflation data for July came out as expected with a 0.1% m/m increase in headline CPI and 0.2% excluding food and energy. Annual headline inflation remains too high at 3.4% and means that wage earners are experiencing stagnating spending power at best, and core inflation is a bit higher than the inflation target of two percent would suggest.

Why is Crude Oil priced for a reopening the ships haven't made?

Fourteen vessels crossed the Strait of Hormuz on Tuesday. Before the war, the count ran near 120 a day. In the sessions since the waterway was publicly declared open, Brent has drifted back to $87 and West Texas Intermediate (WTI) to $81, both a little lower again on Wednesday, with daily momentum on each unwound from the top of its range in late July to the low twenties now.