US dollar: Risks skewed to downside depending on Fed’s forward guidance – BofA

Dhwani Mehta FXStreet

Analysts at Bank of America (BofA) believe that the US Federal Reserve (Fed) monetary policy decision is unlikely to have a significant impact on the FX market, although could yield dollar-negative depending on the language in the forward guidance.

Key quotes

"We expect the Fed to take the first step in shifting from stabilization to accommodative policies at the upcoming meeting. This will likely take the form of stronger forward guidance, linking the ZLB to an inflation overshoot.

“We also expect the Fed to tweak the statement to tie the balance sheet policy to support the economy rather than market stabilization. “

“We do not expect any other policy changes but Powell should address the toolkit in the press conference and perhaps offer some guidance about the triggers to using these additional tools."

"The US rates market will be most focused on changes to forward guidance and any balance sheet adjustments. We see risk the rates market is underwhelmed by the guidance provided by the Fed, which would support higher back-end rates and a steeper curve. “

“We anticipate a subdued reaction in the FX market, with risks somewhat skewed USD-negative on the day depending on forward guidance language."

Author

Dhwani Mehta

FXStreet

Residing in Mumbai (India), Dhwani is a Senior Analyst and Manager of the Asian session at FXStreet. She has over 10 years of experience in analyzing and covering the global financial markets, with specialization in Forex and commodities markets.

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