Midweek, the FOMC meets to deliver their latest monetary policy announcement, where the odds continue to favour a 25bp hike – the fourth move this year. This would take Fed Funds to 2.5%, a level which touches on the lower end of the neutral range which has and continues to be under question. Consequently, the release of the latest rate projections through the dot plot will be of greater interest to the market, having tempered expectations for 2019. The odds for just one move currently stands at a little over 50%, reined in from the forecasts that the Fed will hike at least twice through next year.
Fed chair Powell has clearly stated in recent addresses that policy is data dependent, and while we would expect markets to adopt this perception at all times, recent years have seen a heavier reliance on forward guidance, so we may also see some changes in the statement which may be designed to steer the market towards data inputs rather than measuring sentiment around the general theme of ‘further gradual rate hikes’.
(DXY Daily Chart)
Starting off the week, we have seen the USD coming under a little pressure, and this may be little more than some modest catch up with the rates markets. The latter have been pre-emptive in accommodating for the recent change in rhetoric from policymakers, so there are risks to a surprise on the hawkish side if the dot plot sees little change to reflect market sentiment. In this instance, equities are likely to come under further fire, with the major Wall St indices already teetering on the edge at the levels we are at present.
The USD is still de facto a default currency, gaining on the weakness of others, so the impact of the outcome is pretty binary on how the Fed communicates any endorsement (or not) to how the rates markets are pricing the future rate path from 2019 onwards.
(DXY Weekly Chart)
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