FOMC

With few changes to the policy statement and little in the way of notable developments in the press conference, markets are consolidating.

The resilience of US data we have seen over the past couple of weeks hasn’t led to any further appreciation in interest rate expectations, keeping the dollar in an overall holding pattern with a slight bullish tilt, especially against the weaker currencies like the JPY and EUR. But the likes of the AUD and previously CHF have shown some resilience, perhaps suggesting that most of the positivity may be priced in for the greenback.

We have a busy calendar with what would usually be ‘red flag’ days, including central bank meetings with the FOMC, BOJ and BOE. There’s a reasonable chance we’ll see no action across all three, but the bigger response for global markets could be if the BOJ widen or abandon their yield curve control (YCC).

At the most basic level the Fed delivered what was expected; another policy pause with the potential for further hikes. The opening paragraph tipped noted an economy which is “expanding at a solid pace” with a slower but “strong” job growth and elevated inflation. There’s nothing remotely dovish there. And then we look at the numbers…

The US dollar rises as the Fed still expects another rate hike and only two rate cuts next year

The EUR/USD and other dollar pairs will be in sharp focus for FX traders as the attention turns to the upcoming Fed decision in a few hours’ time. No rate hike is expected, but the market is pricing in about even odds of another rate increase before the year is out.

The GBP/USD will come into sharp focus over the next couple days, with two pivotal events on the horizon: the FOMC and BoE rate decisions. Additionally, traders are anticipating the release of UK CPI and retail sales data, as well as global PMI figures this week. These developments collectively have the potential to shape the near-term GBP/USD outlook. UK CPI could sway BoE decision, with the UK central bank likely to mimic ECB's dovish hike. Meanwhile, the FOMC is likely to go for a hawkish hold.

The GBP/USD is in focus ahead of this week’s key events: FOMC and BoE rate decisions. We also have UK CPI and retail sales, as well as global PMI figures to look forward to this week. The BoE is likely to deliver a final 25 bps hike, while FOMC is seen holding policy unchanged. The GBP/USD could be heading to low 1.20s in this busy week.

Like most markets, EUR/USD and USD/JPY are in holding patterns ahead of today’s FOMC meeting, where traders will seek clues over how long rates will remain elevated.

Three mighty central banks release their monetary policy decisions next week, starting with the FOMC meeting on Wednesday. But Tuesday’s inflation report could also carry some clout as it has the potential to move the needle between an anticipated pause to an undesired hike if it surprises too much to the upside.

Powell appears to be threading the needle between leaving the door open for additional rate hikes while remaining responsive to the current banking stresses.

Ahead of the Fed, the US dollar has generally fallen vs. the euro this year, but there are signs EUR/USD may be losing its bullish momentum after a failed breakout to 1-year highs.

FTSE falls after hot UK inflation. USD/JPY tests the 50 sma resistance ahead of the Fed rate decision.

Today’s UK inflation print could be the difference between a final 25bp hike from the BOE tomorrow, or a pause. Then our attention turns to the FOMC meeting.

Fed fund futures (FFF) suggest an 87.1% chance of 25bp hike for today's FOMC meeting - and I agree with that part. But what about the rest of the curve?

We agree with the market’s expectation that Jerome Powell and company are likely to deliver a 25bps interest rate hike this month, though we certainly wouldn’t be shocked to see the central bank hold fire for now.