WHAT TO EXPECT FROM THE FOMC TODAY

The US Federal Reserve is having its two-day meeting, and will reveal its latest economic policy decisions this Wednesday. There's no press conference scheduled past the event, neither the FED will update its forecast, which means market attention will center in the accompanying statement, and at the same time that no action is expected. 

The FED will likely refrain from announcing a rate hike this week, and market is not expecting any explicit change in the wording of the statement. If it does, however, will be increasing the chances of a September lift-off which should trigger a strong USD rally. 

The wording will be the key, mostly to determinate the timing of a rate hike, as there's no doubt the Central Bank will start tightening this year. A more constructive assessment of the economy, particularly focused on employment and inflation, is what investors are looking for to resume dollar's buying. However, and despite a change in wording, the FED will likely reiterate its stance that the upcoming rate hike will be data dependent. In general, the macroeconomic data has surprised to the upside in the recent weeks, with core CPI inflation up to 1.8% in June, better-than-expected Durable Goods Orders, and up ticking Retail Sales, so if there are changes, should be probably hawkish. 

In its latest testimony before the Congress, Janet Yellen said that " "The Committee will determine the timing of the initial increase in the federal funds rate on a meeting-by-meeting basis, depending on its assessment of realized and expected progress toward its objectives of maximum employment and 2 percent inflation." Also, she had said earlier this year that, it could happen in any meeting, and not only the ones with a press conference scheduled. Nevertheless, the general market sense is that this month meeting will bring no clarity on a date for a rate hike, and will mostly be a non-event, which may have a limited negative effect on the greenback, as it would be in line with market's expectations.

Janet Yellen

Anyway, the Federal Reserve is getting close to raising interest rates for the first time in nearly a decade, in between September and December. As closer the date, the stronger the greenback. Should the FED express some concerns over still weak wages, the market will price in a rate hike in December, which means the Central Bank won't be able to made the two rate hikes this year that many officers have been anticipating lately, and therefore, the dollar may come under selling pressure particularly against the Pound. 

But in the long run, the US is still the one Central Bank that's in the path of tightening its economic policy, followed close by the BOE, and unless data begins to steadily disappoint, long term dollar bears will remain sidelined.


Source:  fxstreet.com