On Wednesday at 18:00 the FOMC will give their monetary policy announcement. The Fed is widely expected to keep policy unchanged. Following the dovish U – turn at the beginning of the year, the Fed have put rate hikes on pause. Whilst the dollar slipped following that unexpected announcement back in January, any sell off in the dollar was limited. This is because central banks across the globe quickly followed suit, cutting growth outlooks and adopting a more dovish stance. The dollar was suddenly the best of a bad bunch.
The market has almost fully priced in the Fed keeping policy unchanged as the Fed’s finger remains firmly on the pause button. Data from the US across the month has been mixed. Whilst manufacturing and industrial production figures are down, US consumers are still confident, headline inflation is above the 2% target and the jobs market is strong. On the global platform, US – Sino trade talks are progressing well, however a Trump – Xi meeting could still be months off.
The Fed’s dot plot currently shows that there will be two rate hikes across 2019. We expect this to be cut to 1. Whilst the data has pockets of weakness, there are also areas showing robust strength. Therefore, cutting the dot plot to 0 hikes could be too extreme. Cutting the outlook to 1 rate rise across the year would also leave the Fed tools in their box to use later in the year should the economic situation deteriorate. With this in mind, those expecting a much more dovish Fed could be disappointed.
With data mixed and no firm end in sight to the US – Sino trade dispute, the Fed will have little reason to move on rates.
Last week saw global equities put in their best weekly performance since November. Indices on Wall Street have extended gains again today after reaching a 5-month high in the previous high. Should the Fed stick with pausing rate hikes, and cut the outlook to 1 hike, then equities could take another leg higher. Given the already marked losses over recent sessions, in this scenario we would expect the dollar to dip marginally lower. The dollar index already dropped 0.7% lower in the previous week and is extending loses at the start of this week as investors price in the expected flattening of the dot plot.
In the case that the Fed are very dovish and cut the dot plot to 0 rate hikes this year, we could see the dollar drop lower back towards support at 95.50, the low from January’s meeting. Stocks could also suffer if investors get overly nervous of the economic outlook. This would result in a sell-off in US equities. Whilst this is unlikely, Jerome Powell has been known to spook the markets.
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