Preview for July FOMC Meeting and Outlook for US Dollar
- Fed funds only pricing in a 12% chance of a hike today; June 2017 most likely period for first hike.
- USDOLLAR Index retaining upside bias despite worst Durable Goods Orders in two years.
- FX volatility set to remain high - it's the right time to review risk management principles to protect your capital.
A few months ago, July was a sure thing; now, it will merely be a milestone on Federal Reserve's long journey to rate normalization. The Federal Reserve will keep its main rate on hold at 0.25-0.50%, citing uneven US economic data and uncertainty in global financial markets (which, admittedly, while calmer now, still have to deal with the looming specter of Brexit).
Thus, while an overall neutral tone is expected in the policy statement, the key for the US Dollar today, however, is to what degree of confidence the FOMC has in the US economy, or simply, 'how quickly does the Fed think it will be able to raise rates next?' Right now, market aren't confident a hike is coming this year:
Table 1: Fed Rate Hike Expectations Through December 2017
As a reminder, the Fed's never raised rates unless the market has been pricing in the chance of a hike in excess of 60%; in December 2015, Fed funds were pricing in a 66% chacne. In reality, being aware of this confidence threshold, rate expectations are muted through the end of this year. Yet this in turn represents an opportunity for the US Dollar: if the Fed does anything that suggests it will raise rates this year, then there is a rate differential gap that needs to be closed. Further advancement by market pricing should help serve as a bullish catalyst for the US Dollar.
--- Written by Christopher Vecchio, Currency Strategist
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