FOMC Preview: Low Talk and Impact on the US Dollar
The Federal Reserve’s monetary policy announcement on Wednesday could pave the way for how currencies and currencies will trade over the next month. With this in mind, the dollar maintained its bid ahead of a rate decision. The Japanese currency pair also hovered near two-month highs above 110 as USD/EUR settled below 1.2150. Today’s US economic reports were also supposed to have a significant impact on the position of the FOMC trader, and the fact that investors ignored the weaker reports is an important sign of how much sentiment has skewed over the event, as they continue to outpace the weak data in favor of higher prices and a stronger recovery.
It also fell by 1.3% in May, which was much weaker than expected. Economists had expected a decrease in spending, with the supply of cars falling, but they expected a rise excluding cars of 0.2%. Unfortunately, core retail sales fell 0.7% as consumers shifted their spending from goods to services. The demand for home improvement has also given way to more expertise in spending on restaurants and accommodation. While manufacturing activity in the New York area also grew at its weakest pace in three months, according to an Empire State survey. However, the US boom tells us that investors expect the Fed to succumb to higher prices and tackle the issue of reducing rather than avoiding asset purchases, especially with product price growth hitting a record.
Investors need to be wary of the possibility of disappointment with the Federal Reserve. US policymakers have insisted on every occasion that the price hike is temporary and will ease as pent-up demand eases and supply chain disruptions ease. The prospects for recovery are also strong, but consumer demand and job growth over the past two months have been weak. Just like the European Central Bank, which avoided piecemeal talk last week, if the Fed is cautious, it will want to wait for real data improvements before acknowledging that it’s time to start talking about scaling back its $120 billion per month bond buying program.
On the other hand, market conditions are ideal to start a conversation. Stocks are strong, volatility is low and investors are bullish, providing a cushion for a deep correction. By alluding vaguely to research limiting bond purchases, conditions are giving investors a full summer to discount changes ahead of the Fed’s Jackson Hole summit in August.
Also tomorrow the main focus for investors will be the Fed’s “dot chart” outlook and Fed Chairman Jerome’s press conference, with no changes in monetary policy expected. Any discussion of adjusting the pace of bond-buying will also be revealed in Powell’s speech and clarified in the question-and-answer period. Back in March, when the Fed’s economic forecasts were last updated, the dotted chart showed an 11-7 split for a 2023 rate hike. Now, it is widely believed that the outlook will turn to a tightening next year.
If you’re trading the FOMC, here’s a summary of what’s going to happen today:
The US dollar may see an initial rally at 2 pm. New York time, if the dot graph shows expectations for the first rate hike shift to 2023. After that we expect a consolidation, with a bias to the upside before Powell speaks. If he admits the need to start talking gradually, the US currency pair could fall towards 1.20 and the USDJPY could rise to 111. However, if he gradually avoids talking and downplays the immediate need to discuss reducing asset purchases, effectively double Given that inflation is temporary, the US dollar can drop quickly and strongly.
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