This Is What You Should Expect From The FOMC

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This Is What You Should Expect From The FOMC

This Is Why A Rate Hike Isn’t That Important

The FOMC is due to meet next week and by all accounts they are expected to raise rates. While a rate hike will be a dollar-positive event it is most likely already baked into the market expectation and may not produce a rally. The news that may spark a rally, or a decline, will be the committees view on future rate hikes. The policy decision is due out next Wednesday at 2PM (-5 GMT) with a press-conference scheduled for after.

The CME’s FedWatch Tool, a gauge of rate-hike expectations based on the Fed Funds Futures contracts, shows a 100% chance of hike at this week’s meeting so there is little doubt one is on the way. The tool also shows a growing chance of a fourth hike in 2020, to 225 basis point or 2.25%, an event that has been debated since the first of the year. The question now is how many hikes will there be in 2020?

The FedWatch Tool is showing about a 50% chance for four rates in total by next October, regardless of what they do next week and at the December meeting. The market will be reading the FOMC policy statement and hanging on to every word spoken by Jerome Powell at the press-conference following. The recent economic data shows U.S. inflation growth is contained, if the FOMC gives any indication they are backing off their rate-hiking timeline or have lowered the upper target for interest rates the dollar could see a massive sell-off.

Potential for a dollar sell-off is also brewing in foreign currency. Both the ECB and BOE have indicated a need for future rate hikes and within the next 12 months. The ECB may not act on their plans until the third quarter of 2020 but the BOE is sure to act much sooner than that. Consumer level inflation data from the UK showed a strong gain and acceleration above expectations which is cause enough for the BOE to act.

The Dollar Index is poised to fall although it is also showing signs of support at the $94 level. The $94 level has been an important pivot level for many years and is likely to produce a significant move regardless of the direction. The indicators are bearish and support a move lower, all the index needs now is a push to new lows to get the selling started. Additional catalysts exists as well, including but not limited to trade relations. As trade relations and fear of trade war simmer down risk-on appetite could help fuel the dollar’s decline.

Weekly Market Digest: What Should You Expect From the Fed?

U.S. stocks took a pause this week, coming off recent highs as investors digested a mixed bag of corporate earnings and the possibility for a Fed rate cut at the end of July. Bonds and gold both ended the week higher. Abroad, China reported slowing economic growth, while central banks in South Korea, Indonesia and South Africa began lowering interest rates. Foreign stocks were slightly down.

Weekly Returns:

S&P 500: 2,977 (-1.2%)
FTSE All-World ex-US (VEU): (-0.3%)
US 10 Year Treasury Yield: 2.05% (-0.07%)
Gold: $1,425 (+0.8%)
USD/EUR: $1.122 (-0.4%)

Major Events:

  • Monday – China reported weaker than expected economic growth, with GDP slowing to a 6.2% annual pace.
  • Tuesday – Facebook was questioned on Capitol Hill over its yet to be released cryptocurrency Libra, facing concern by U.S. senators over trust and potential regulation.
  • Tuesday – A number of major U.S. banks reported mixed earnings, with many showing slowing loan growth and declining net interest margins.
  • Tuesday – U.S. retail sales came in better than expected, rising 0.4% in June from the previous month.
  • Wednesday – The EU said it will investigate Amazon on antitrust charges regarding third party merchants.
  • Thursday – Boeing announced it will take a $4.9 billion charge in the second quarter due to the grounding of its 737 Max.
  • Thursday – President Trump said the U.S. Navy downed an Iranian drone in the Strait of Hormuz—a claim Iran has denied.

Our Take: What Should You Expect From the Fed?

Did the events of this week call rate cut expectations for the next FOMC meeting into question? To be sure, Chairman Powell’s comments have continued to hint at possible easing, and the market agrees with almost 100% certainty. In fact, current Fed Funds futures are even pricing in a 45% probability rates could be cut by 0.50%, rather than a more typical 0.25% move. So is this warranted?

It depends on which way you look at it. For the most part, there are many positive data points out there. Just this week there were strong reports with respect to retail sales, factory output, and even unemployment, which still sits at historically low levels. Throw in a stock market continuing to push all-time highs, and the idea of a rate cut seems rather wild.

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But there are other factors at play. Corporate earnings have been a mixed bag, inflation remains muted, and there is no indication the trade war with China is anywhere near a resolution. So is this enough to warrant a cut? Tough to say, as it’s mostly predicated on unknown future outcomes, which is somewhat out of line with the Fed’s historical approach to these decisions.

Having said all that, a single small rate cut is unlikely to spark any massive imbalance in the global economy, even if the timing eventually proves imperfect. So you could almost view it as an insurance policy, which is the way many will likely interpret the move. But as we pointed out in our latest Market Review & Outlook, it could also be a sign the Fed is growing more susceptible to political and popular pressure.

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.
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What can we expect from the FOMC? 5 opinions

The Federal Reserve convenes for its July 2020 meeting and we focused on one word. Here are 5 additional views from banks:

Here is their view, courtesy of eFXnews:

USD: No Change From The FOMC This Week But Balance Of Risks Slightly Bearish – Danske

Danske Bank FX Strategy Research expects the Fed to maintain the Fed funds target range at 1.00-1.25% at this week’s meeting, in line with consensus and market pricing.

“As it is one of the small meetings, all eyes are on the statement, as there are no updated projections and no press conference. Given the Fed seems to act only at the big meetings, we think the Fed will wait until September to make an announcement on ‘quantitative tightening’, despite many FOMC members thinking they should get going ‘relatively soon’.

We do not think there will be major changes to the FOMC statement, although it is likely the probability is skewed towards a slightly more dovish tone given inflation has now been weaker than expected for four consecutive months,” Danske argues.

Danske is currently reviewing its EUR/USD forecasts.

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USD: Expect 2 Notable Changes From July FOMC Statement; Impact On USD – Credit Agricole

Credit Agricole CIB FX Strategy Research notes that the FOMC meeting on Wednesday will not be accompanied by the new projections and a press conference but there could be some notable changes to the statement.

First, the statement may further emphasise that inflation developments are being monitored closely given the recent disappointing readings and hints of doubt in the Chair’s testimony last week. Second, the statement should also start to point to balance sheet reduction plans being announced in September, possibly repeating the “relatively soon” reference,” CACIB adds.

“As such the two innovations should be somewhat mutually offsetting in terms of their USD impact,” CACAIB argues.

USD: July FOMC A Non-Event For USD; Follow The Momentum For Now – BofAML

Bank of America Merrill Lynch FX Strategy Research expects the FOMC to send a strong signal at its July meeting that balance sheet normalization will be announced at the September meeting.

“The FOMC is likely to tweak the statement to strengthen the commitment to balance sheet normalization but express greater concern about low inflation. Specifically, we expect the FOMC to note the Committee expects to begin implementing a balance sheet normalization program “ soon “ . This would send a message that the FOMC is on track to announce the start of normalization at the September meeting. W e also expe ct the FOMC to emphasize the recent subdued inflation .

The outcome of these potential language changes would signal the FOMC is more cautious re garding the path of future rate hikes, but still committed to shrinking the balance sheet , in our view,” BofAML argues.

FX: a non-event for USD.

We do not see much of a USD impact from the meeting. Market implications from FOMC meetings without a press conference are usually limited and short – lived. We expect new policy initiatives this fall : more details on unwinding the balance sheet and one more hike. The consensus is also that the July meeting will be a non-event for the USD, with recent flows mostly driven by other events , ex ECB, data and risk sentiment.

In the meantime, we would follow the momentum against the USD, until we get some signs to become contrarian and go long,” BofAML adds.

USD: FOMC Won’t Likely Challenge Bearish Outlook This Week – BTMU

BTMU FX Strategy Research notes that the recent weakness of the USD has been driven as well by dampened expectations for further Fed policy tightening, and doesn’t expect the Fed to challenge this bearish outlook at this week’s policy meeting.

“The latest FOMC statement is expected to display more caution over the pace of further policy tightening by signalling more concern over the softer inflation recorded in recent months.

The Fed is still likely to view recent softer inflation readings as driven partly by temporary factors but that view is currently being challenged,” BTMU argues.

USD: Rise Of Real Yields To Keep Fed Cautious; USD To Remain In Check – CIBC

CIBC FX Strategy Research argues that while it might be tempting to look at today’s 5-year UST yield and conclude that interest rates have actually eased financial conditions so far this year, what really matters for investment and consumption decisions are not nominal yields, but real yields.

“And, there’s no question that 5-year real rates have been increasing. Both market-implied rates and those calculated using actual inflation data show a general uptrend in recent months,” CIBC notes.

As a result, CIBC expects the Fed to remain cautious into year-end but still sees some upside for Fed hikes versus what’s now priced.

CIBC expects the USD to stay in check over the second half of 2020 as a result.

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About Author

Yohay Elam – Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I’ve accumulated. After taking a short course about forex. Like many forex traders, I’ve earned the significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I’ve worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts. Yohay’s Google Profile

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