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Video: What to Expect from the FOMC And Dollar, SPX Reaction

Video: What to Expect from the FOMC And Dollar, SPX Reaction

John Kicklighter, Chief Strategist

Talking Points:

  • Though nothing is impossible, the FOMC is very likely to meet market expectations and hold Wednesday
  • Speculation of the central bank's future path will certainly drive markets with only a 16% chance for July
  • The Dollar may benefit from both a scenario where the Fed keeps July open or even if it writes off hikes altogether

See how retail traders are positioning in the Dollar-based majors ahead of the Fed decision using the SSI readings on DailyFX's sentiment page.

Alongside fears surrounding the Brexit and the threat of a slide in general risk trends, FOMC speculation is a key fundamental theme for the entire financial system. The rate decision is scheduled for Wednesday at 18:00 GMT, and the market seems quite certain of the outcome. Swaps are only allowing a 2 percent chance that the group will hike rates. Given the surprise and thereby volatility that would result from a hike, it is very likely that central bank heeds the threat and capitulates. However, that doesn't absolve the event of volatility...far from it.

As has been the case throughout 2016, the focus of this upcoming rate decision will be on the probability and timing of policy bearings moving forward. And, the June meeting will be particularly illuminating on that front as it is one of the 'quarterly' meetings with updated forecasts and it comes at a critical juncture given their previous expectations. As of the March update to forecasts on rate projections for the year, the central bank set the outlook to 50bps or two standard hikes. Holding steady this month with little force behind a July option could force the Fed into a position where the market prevents meeting those expectations.

The Dollar's reaction to the FOMC meeting has multiple facets. On the surface, a hawkish outcome that provides for a higher July hike probability can rally the Dollar. Alternatively, a dovish outcome would no doubt eat into yield premium founded since the May turn at the very least. Yet, speculation from the market makes this event much more dynamic. Perhaps the most important side effect of this event is its implications for risk appetite. Aggressive dovish policy from the ECB and BoJ have publicly failed to generate meaningful lift in sentiment and thereby speculative assets. Would a Fed delay do any better, or would the concerns that hamper the Fed's normalization translate into general risk aversion? Genuine fear has driven strong bulls tides many times through modern history. We discuss this important events, scenarios, repercussions and tradability in today's Strategy Video.

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