|
|
 |
 |
|
RESEARCH NOTE: FOMC Preview - Much Ado About Nothing
Brian Dolan, Chief Currency Strategist
The main event this week is the Federal Open Market Committee meeting on interest rates and accompanying press statement. The two day meeting runs from June 24-25 with the press statement released at 14:15ET on Wednesday, June 25. The idea that the Fed will leave interest rates unchanged has been fully embraced by the market, with all estimates looking for a steady 2.00% result and the futures market pricing in a slim 2% chance that the Fed hikes 25 basis points. As such, the focus falls squarely on the press statement.
We look for the Fed to make some minor tweaks to the economic and inflation assessment while their take on financial market stress and deep housing contraction will be unchanged. Bernanke's speech two weeks ago at the Boston Fed will prove prescient in what we can expect. The characterization of economic activity will likely be upgraded to something that notes lower risks of a substantial downturn, echoing Bernanke's comments. On household spending we expect the Fed to point out that the fiscal stimulus has thus far led to a tangible pickup in consumer spending -- the latest retail sales report showed this through loud and clear.
That said, the most pertinent part of the communique will undoubtedly be how the Fed's assessment on inflation and risk bias changes. We look for the committee to note an uncomfortable increase in inflation expectations and a more pronounced risk of rising inflation on the back of higher food and energy prices. They might even go so far as to change their symmetric risk assessment (growth and inflation risk are even) to focus more on inflation. Indeed, Bernanke noted how the FOMC "will strongly resist an erosion of longer-term inflation expectations" and thus it is quite possible that the Fed will harp on this further. In our view, however, the FOMC is likely to leave the risk assessment balanced towards both growth and inflation. Given the continued deterioration in housing, stressed financial markets, a weakening labor market and the unknown about how post-stimulus consumer spending will hold up, we believe the Fed will be prudent and will not shift their overall bias.
In terms of what this means for the USD, we would expect to see a USD bullish reaction to the initial headlines as the market is likely to focus on the hawkish inflation characterization and bid the buck up. However, anything short of the FOMC changing their bias towards inflation or suggesting that current rates are now "accommodative" is likely to see initial knee-jerk gains in the USD dissipate. This scenario then favors selling USD in the post-Fed reaction. Should the Fed in fact adopt a tightening bias on the back of higher inflation expectations, the USD is likely to sustain gains as expectations of future rate increases are reinforced. However, lacking any signs of urgency from the Fed, we would not expect the USD to run away on the upside, suggesting profit-taking on long USD positions will eventually limit USD upside gains.
We will update the Forex Insider with our analysis and likely Forex market reaction immediately following the Fed's announcement on Wednesday.
Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
|
|
 |
|
