FOMC What to expect

This evening the Federal Open Market Committee (FOMC) will conclude its 2-day policy meeting and give its monetary policy decision. The Fed is not expected to make any changes to policy, for two reasons; firstly, interest rates were raised at the last meeting and secondly because the Fed rarely make changes to policy at meetings which are not followed by a press conference. So, of all the central bank policy decisions this week, the Fed’s is set to be the least surprising.

Despite that no rate rise expected, no press conference nor economic projections, the meeting could still cause a reaction from the dollar as investors scrutinize the statement for subtle changes in language.

Robust economy

The statement is expected to highlight the strength of the US economy. Data continue to impress pretty much across the board, except for housing data which is weaker. The labour market remains strong, inflation is at or near the 2% target, consumer spending is healthy, both manufacturing and service sector activity is accelerating. The economic picture is encouraging and leads us to expect that the statement from the Fed will be hawkish in tone, supporting market expectations of at least one more interest rate rise this year, if not two.

Downside risk?

Any downside risk could come from two sources. Firstly, President Trump’s comments earlier in the month when he expressed his displeasure at the Fed hiking rates so aggressively, lifting the dollar and removing its competitive advantage in trade. Following these comments, the dollar dropped away from its one year high. However, the reality is the Fed is independent and this is unlikely to have any impact on Fed Chair Jerome Powell’s outlook or that of his colleagues.
Secondly, the impact of trade wars which could hit the US economy. However, in his bi annual appearance before Congress, Fed Chair Powell was relaxed about the developing trade war and did not view it as a reason to shift policy. There is no particular reason as to why his view should have changed.

Expected market reaction:

Given the disappointment from the BoJ earlier in the week, which intends to continue on the path of loose monetary policy, USD/JPY will be a particularly interesting pair to watch. Any hawkish changes to the statement from the Fed could make the dollar a good buy ahead of Friday’s US jobs report and comfortably lift USD/JPY above 112.00 to 112.6 before targeting 113.
A less hawkish than anticipated statement could see the USD/JPY retreat back towards 111.20.