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Fed Decision Attempts to Light Fire Under Dollar, S&P 500

Fed Decision Attempts to Light Fire Under Dollar, S&P 500

John Kicklighter, Chief Strategist

Talking Points:

  • The FOMC rate decision is set for 18:00 GMT Wednesday and the next meeting will be a 'quarterly update' on Sept 21
  • A rate hike is a very low probability, but the market has grown accustomed to looking for statement clues
  • Pairs like EUR/USD, GBP/USD and USD/CAD are freer to react while USD/JPY will be constrained by BoJ anticipation

See the DailyFX Analysts' 3Q forecasts for the Dollar, Euro, Pound, Equities and Gold in the DailyFX Trading Guides page.

The FOMC rate decision due today represents the event risk with the greatest fundamental and speculative reach in an otherwise stocked docket. That said, potential does not guarantee significant impact. The limitations of this event will be juxtaposed with the building anticipation of the market environment. According to Fed Fund futures, the market sees a sparse 10 percent probability that the central bank will lift rates at this meeting (I put that chance even lower). However, the market has found the bulk of its rate-related volatility and momentum in rhetoric and speculation. The accompanying monetary policy statement can move the Dollar and perhaps broader risk trends.

For the Dollar, even the potential of a rate hike moving forward would dramatically contrast to the trend of its global counterparts. With negative rates in Japan and the Euro-area, the BoE expected to revive easing efforts, and projected rate cuts from the RBA and RBNZ; US returns - even at such meager levels - boast an advantage. Interpreting the value of that premium falls to the market's interpretation of timing. With the market's projecting only a 50-50 chance of even one hike in 2016 and the Fed still operating with the June forecast of 50 bps worth of hikes this year, there is room for speculation to drive the Dollar. Choosing which pair to take a position on this event risk needs to be considered carefully. USD/JPY will be competing with intense speculation of volatility in the wake of the BoJ rate decision later this week. Meanwhile, USD/CAD, GBP/USD (after UK GDP), NZD/USD and EUR/USD are less obstructed.

Market conditions matters a lot in the impact this event triggers. The rise of extreme stimulus with discussion of helicopter money and push to negative rates leverages the impact of an other wise measured event. This context can also amplify the impact of the Fed decision for investor sentiment across the global financial system. Aggregate monetary policy is losing traction in spite of the increasingly aggressive efforts worldwide. In a market where expected returns (income, dividends, coupon, carry) are at record lows, investors are exposed to remarkable risk to make return and liquidity has thinned with tacticians taking share from investors; losing confidence in stimulus and recognizing limited capacity to thwart future problems could prove crippling. We discuss the short-term potential from the upcoming FOMC rate decision along with its longer-term implications in today's Strategy Video.

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