FX Market to Focus on FOMC Statement for Rate Hike Timing Clues

• USD Recovers Ahead of FOMC Expecting Hawkish Bias
• FOMC Statement to be Dissected Looking for Rate Hike Clues
• US Confidence Disappoints and Market Awaits FOMC and US Q2 GDP

The Federal Open Market Committee (FOMC) will wrap its two day meeting Wednesday, July 29 at 2:00 pm EDT and will release a written statement along with its monetary policy decision. There is no interest rate change expected at this meeting. The timing of the first rate hike will be the main the answer the market will try to gleam from the FOMC statement. The next meeting will be in September and could see the start of a new monetary policy cycle if the Fed starts raising interest rates.

The Federal Reserve shocked markets on December 2009 with a 75 basis points rate cut that left the benchmark interest rate at its lowest on record. In May 2013 the then Fed Chair Ben Bernanke sent the markets into a massive sell off after announcing the central bank would start tapering its quantitive easing purchases. The announcement sent shockwaves through all asset classes even though the Fed would not start trimming purchases until December of that year. Bond purchases would be fully tapered down in the fall of 2014 which is where speculation on the first rate hike started. The September 2015 FOMC meeting will take place eleven months after the end of the taper and by some forecasts would be where the central bank raises interest rates. The USD has gained on a rate divergence basis, yet the rate hike has taken longer than expected to materialize.

The Fed has stressed that if there is further improvement to the labor market it will lead to higher rates. As the American jobs component gets back to normal, the closer the Fed is to pulling the trigger on the awaited benchmark interest rate hike. If the FOMC statement includes hawkish comments regarding employment that could be read as a signal of a rate hike as early as September. Economists are then divided on what could happen next. A faction of central bank watchers considers a single rate hike the most the Fed could do under the current economic conditions. The projections published by mistake form the Fed’s staff share this analysis as they implied only one rate hike. There is a growing second group that finds support in the comments from hawkish members from the Fed that are forecasting two rate hikes. One in September and the second one in December. Previous statement and press conferences appearances from Chair Janet Yellen do not discount the two rate hike theory, but ever since the Fed’s focus on “data dependency” the economic indicators would have to improve to make it a reality.

The interest rate timetable has been affected by the adverse macro economic conditions that crippled gross domestic product growth (GDP) in the first quarter of the year. The June FOMC came and went with not change and that put the September meeting in the spotlight. At this junction an unchanged language in the statement would push back the announcement of a first rate hike to December, with a growing probability of a no monetary policy changes for 2015.

Economic indicators have been mixed this week in the United States. American core durable goods orders came in at 0.8 percent beating the forecast of 0.4 percent. The Conference Board’s Consumer Confidence survey came in lower at 90.9 when 100.1 was expected. American consumers continue to doubt the strength of the economy and are not seeing any trickle down effects which is limiting their spending. The U.S. economy depends on internal consumption to achieve a stronger rate of growth that would justify higher interest rates.

The release of the second quarter advance U.S. GDP on Thursday, July 30 at 2:00 pm EDT is expected to be above 2.5 percent after a disappointing contraction of –0.2 percent in the first quarter. Despite the language included in the FOMC statement the first release of GDP data has the power to appreciate the USD across the board. If the rally is triggered by a hawkish FOMC it would be further boosted by strong growth in Q2. If the Fed decides to give little insight or turn dovish it will hurt the USD in the short term, but could face a revival with a positive GDP release.

USD events to watch this week:

Wednesday, July 29
2:00pm USD FOMC Statement
2:00pm USD Federal Funds Rate
Thursday, July 30
8:30am USD Advance GDP q/q
8:30am USD Goods Trade Balance
8:30am USD Unemployment Claims

*All times EDT