USD: Status quo Fed and a rebound in 2Q US GDP could be supportive - ING

Given that very little has changed in the US economy since the Fed last met, Viraj Patel, Research Analyst at ING suggests that they think the market narrative around the July FOMC meeting this week to centre around two things: (1) the Fed's 2H17 policy sequencing and (2) the concerning nature of accommodative financial conditions.

Key Quotes

“The view that the Fed will begin its balance sheet normalisation policy in Sept will likely be supported by the July statement noting that the process could start “relatively soon”. This has certainly been the message from Fed officials over the past month, with even the more conservative members such as Lael Brainard championing this idea. While the Fed will refrain from actually committing to a start date this week, we see plenty of reasons to start the balance sheet run-off process sooner rather than later – not least the fact that financial conditions are evidently becoming unresponsive to adjustments in the short-term policy rate.”

“The front-end of the US rate curve seems to be priced correctly for such a Fed policy sequencing, with markets still erring over a Dec hike; a status quo Fed statement could be mildly supportive for a politically plagued $. For global markets, we are shifting to the idea that a rise in long-term yields driven by a pick-up in the term premium may be the lesser of two evils; risky assets stand a better chance of withstanding such a bond market adjustment, rather than one due to a sharp re-pricing of policy rate expectations.”