FOMC likely to be dovish

The Federal Reserve is set to have its monthly FOMC statement shortly and markets will be paying close attention to Yellen’s words. The market is poised to react to two key sides... Whether she is hawkish or dovish, the result will move markets and may even create some nice trading opportunities in the process.

Weighing up both sides can be quite hard, but looking at a hawkish result requires a few certain things, it requires a strong US economy and a willingness from Yellen to raise rates sooner rather than later. The things that may be supporting a hawkish response would be the recent positive data in retail sales (up 0.7% m/m); which has been much stronger than anticipated in the lead up to Christmas. On top of this we have had recent consumer sentiment data which has been very bullish – a positive sign in the world’s largest consuming economy – and leads to the possibility of Yellen being upbeat on the prospects of a consumer lead recovery. The unemployment figures have also been quite nice as of late and the recent non-farm payroll has been positive for the most part with the last reading very strong at 321K. Unemployment claims, though have been a little disappointing so that is something that could weigh on labour comments.

On the Dovish side of things Yellen always finds a way, and PPI has been disappointing of late for the American economy. Recent data on PPI was down to -0.2%, an annoying movement for the FED. But what is more of a concern for the FED is general global trends, and the slowdown in developing economies. Not wanting to get trapped into the same sort of predicament, the FED is likely to pay close attention to the global situation before looking to raise interest rates. A large amount of QE in Europe is a likely even in the future, and the markets will be looking at the FED for a rate rise which could see the Euro tumbling rapidly. On top of this you have a very weak oil market, which is generally positive for the American economy, but some global economies are suffering sharply as a result and US infrastructure investment in the oil industry is likely to slack off as a result.

What I do believe is that the FOMC statement will reiterate the strength of the US economy, however Yellen is likely to stay on the fence as the global economy looks to be slowing ever so slightly. With threats out there this dove is likely to keep rates as low as possible, until inflation figures pick up and the global economy improves.