Mon. Oct 18th, 2021

FOMC preview: reduced conversation and impact on the dollar

Daily summary of the foreign exchange market 15.06.2021

By Kathy Lien, CEO of FX Strategy for BK Asset Management

The outcome of Wednesday’s Federal Reserve monetary policy announcement could set the stage for the U.S. dollar and currencies to run over the next month. With that in mind, the greenback kept its offer before the rate decision. The USD / JPY hovered near 2-month highs above 110, while the EUR / USD remained below 1.2150. Today’s US economic reports should have a big impact on traders ’positioning in the FOMC and the fact that investors ignored the weakest reports is an important sign of how sentiment is distinguished at the event. They continue to look for weak past data in favor of rising prices and a stronger recovery.

Retail sales fell -1.3% in May, which was significantly weaker than expected. With the decline in car supply, economists forecast a decline in spending, but expected retail sales of ex-cars to rise by 0.2%. Unfortunately, basic retail sales fell -0.7% as consumers shift spending from goods to services. Demand for home improvements led to more experience spending on restaurants and accommodations. Manufacturing activity in the New York region also grew at its weakest pace in three months, according to the Empire State Survey. Still, the buoyancy of the dollar tells us that investors expect the Fed to fall in price rises and address rather than avoid the issue of reducing asset purchases, especially with rising prices. of production that reached a record.

Investors need to be wary of the Fed’s potential for disappointment. U.S. policymakers have repeatedly insisted that price increases are transient and will fall as demand and supply chain disruptions are reduced. The prospects for recovery are solid, but consumer demand and employment growth in the last 2 months have been reduced. Like the ECB that avoided the reduced conversation last week, if the Fed is cautious, it will want to wait for real data improvements before admitting it’s time to start reducing the $ 120 billion a month bond purchase program .

On the one hand, however, market conditions are ideal for starting the conical conversation. Stocks are strong, volatility is low and investors are optimistic, providing cushioning for a deep correction. By vaguely mentioning that they want to cut bond purchases, they give investors a whole summer to discount the changes ahead of the Fed Jackson Hole summit in August.

Without expecting changes in monetary policy, tomorrow the main focus of investors will be the forecast of the Fed points scheme and the press conference of Fed Chairman Jerome Powell. Any discussion about adjusting the pace of bond purchases will be revealed in Powell’s speech and clarified in the Questions. In March, when the Fed’s economic projections were updated, the points plot showed an 11-7 split over a 2023 interest rate hike. It is now widely believed that forecasts will harden. -se next year.

If you are trading FOMC, here is a summary of what will happen tomorrow:

The US dollar could experience an initial saving at 2pm in New York if the points plot shows expectations of the first rate hike to move to 2023. After that, we expect a consolidation with an upward trend before Powell speaks. If you recognize the need to start talking taper, EUR / USD could fall to 1.20 and USD / JPY could rise to 111. However, if you avoid talking taper and minimize the immediate need to discuss reducing the purchase of taper assets, effectively doubling in his view that inflation is transitory, the dollar could fall rapidly and aggressively.

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