What little activity there has been in markets has dropped to a barely noticeable level ahead of the Fed meeting, which even the legend Paul Tudor Jones has described as the ‘most crucial in [Jerome] Powell’s career’. Markets, which always prefer change to stasis, seemed to have pinned their hopes on some changes in the statement that will point towards a recognition of inflation pressures and will bring forward the tapering of asset purchases. It is true that the FOMC will have a tough time of it tonight defending the transitory line on inflation, but it’s their line and we can expect it to be reiterated. Markets have been in deep freeze the last few days waiting for tonight’s decision, but those hoping for a mis-step from the chairman will probably be disappointed – he knows where the questions will focus and will be determined not to be caught on the hop.
The place to go for immediate reaction tonight will clearly be the US dollar, and having seen the dollar basket’s gains from the May low begin to stall it looks like the risks could be skewed to the downside. A dollar fall puts another rocket under gold prices, and could spark the rebounds traders in EURUSD and GBPUSD have been waiting for. A few more dots in the right columns could boost the greenback, but that seems an unlikely outcome at this point.
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