Preview for FOMC Meeting and Trade Setups for USD-pairs
- USDOLLAR Index faces critical support near 11977.
Today's FOMC meeting presents itself as much of a top event as it does as merely a passing checkpoint. At this point in time, it's been priced in that the Fed won't be raising rates later today. Without pundits, or economists, or markets (via fed funds futures contract implied probabilities) pricing in a rate hike by any means, the FOMC's July policy meeting really is about the FOMC's September policy meeting.
While the Fed is unlikely to pre-commit to policy action - Fed Chair Janet Yellen learned the kind of backlash that could whip up when she suggested last year that the first rate hike could come six months after QE purchases ended (the Fed didn't in the first half of this year, provoking a US Dollar correction at the start of Q2) - it's very possible that Fed policymakers take a hawkish approach at today's meeting. In recent weeks, at her semi-annual Congressional testimony, Fed Chair Janet Yellen suggested that a hike in 2015 is very much on track. Likewise, recent gains in labor markets and rising wage pressures have caused others - St. Louis Fed President James Bullard - to suggest that the September meeting is 'effectively a coin toss' for a rate hike.
As we've covered in recent days, there is a divergence between what policymakers may be signaling and what markets believe. Per the fed funds futures contracts, the implied probability of a rate hike in September is around 20%, and the most likely period for the Fed's first rate hike is in January 2016.
Accordingly, either the market is too dovish for the Fed; or the Fed is too hawkish for the market. If the market is behind the Fed, hawkish commentary could provoke higher short-term US rates, thereby boosting interest rate differentials in favor of the US Dollar for the foreseeable future.
On the other hand, if the Fed is ahead of the market and backs off its optimism about at least one rate hike in 2015 (taking a more dovish tone with respect to developments in Chinese financial markets, Greek debt negotiations, and global energy markets), the market is more or less already expecting that outcome already, and therefore the downside for the US Dollar may prove to be limited over the coming days.
--- Written by Christopher Vecchio, Currency Strategist
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