• Joel

USD Risk Ahead: FOMC Rate Decision Tomorrow

At 1900BST/1400EDT tomorrow, the FOMC releases the result of their latest policy & rate decision. 

Markets expect the FOMC to keep rates on hold at 0.0-0.25% and for Powell to maintain his dovish tone on the outlook for the US economy (although most expect an acknowledgement of the recent sooner than expected improvement in the US labour market). 

The Fed will release updated economic projections for the US economy, which markets expect to show below-target inflation and elevated unemployment beyond the 2022 forecast horizon - meaning monetary policy will likely remain accommodative until at least then. 

The main focus of the meeting will be on what new forward guidance the Fed provides us with; will they formally transition their current QE programme into one with fixed monthly purchase amounts? 

Goldman Sachs expects the Fed to transition towards a more traditional, open ended QE programme, in which the Fed will buy $80bln in bonds and $40bln in mortgage-backed securities per month. 

The reason the Fed will want to shift back towards providing a fixed monthly buying amount is to increase certainty; at the moment, no one knows much much the Fed is going to be buying, creating a source of some uncertainty for markets. 

Will they provide forward guidance on the economic conditions that need to be met to start hiking rates again? 

Markets want to know under what conditions the Fed will start to reverse its dovish policies. Given that “lift-off” is still likely some time away, the Fed will not have to be too specific, but more details would be nice (for example, if employment reaches x and inflation x, we will do x). 

Will they give more indications as to the discussion on yield curve control? 

A WSJ article earlier in the week confirmed what many had suspected for some time; the Fed is looking at a front-end yield curve control programme like that the RBA has implemented - the RBA’s programme targets Australian government 3-year debt at 0.25%. Will the Fed do the same?

The big move to the south seen in recent days in USDJPY has been attributed by many analysts to growing expectations from Japanese investors that the US/Japanese yield differential is set to close drastically soon - a prediction that yield curve control is coming? 

USD to remain in a bear trend

Whatever the outcome, it is unlikely to shift the bearish tide that has taken DXY into the 96s from 103 highs back in March for a few reasons; 

1) As the global economy reopens, central banks pump stimulus and the data picks up at a faster rate than expected, demand for havens (including USD) has been continually undermined. The Fed has been by far the largest pumper of stimulus globally, which has substantially hit USD. 

2) Meanwhile, USD fundamentals have shifted dramatically from the pre-Covid-19 world. The US is no longer seen as an economic outperformer amongst developed nations and the interest rate advantage US assets have enjoyed over the past few years has been substantially eroded, seemingly for good.



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