Talking Points:
- The Federal Reserve is due to announce its decision on monetary policy at the conclusion of its two day meeting at 18:00 GMT
- Speculation is very explicit about the Fed's timing with virtually zero chance of a hike today but 98% probability Dec 13th
- Monetary policy is a key theme for 'risk' and the Dollar, but President Trump's Chair pick on Thursday will likely have more pull
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While there are a range of high profile events scheduled for this week - from NFPs to multiple rate decisions - top billing is arguably the Fed Rate decision today. That said, where the event will capture the entire market's attention, its outcome is unlikely to redefine the financial system. Anticipation is both clear and extreme for this critical event which means market participants feel they have fully priced in the event's impact on the markets and therefore can turn their attention further into the future towards those events that either don't have a binary outcome or a definitive forecast. That distraction can be a mistake however. While the Fed's decision is assumed, the implications of following through on the market's speculated course further distinguishes the US financial system, markets and currency on the global stage. What the central bank decides today can set or alter the course for months or years to come.
Heading into the November 1st policy meeting conclusion, the markets are definitive on their views. The probability of no change at this particular meeting is essentially nil according to both overnight swaps and Fed fund futures. In contrast the expectations for the final meeting this year (December 13th) are dialed to 83 and 98 percent via these two assets respectively. That conviction in timing across the masses is in large part the result of the Fed's persistent effort at transparency. It also establishes a deeply rooted sense of certainty that can dull response to the unexpected and encourage traders to check out when it comes to projecting the future path of monetary policy. And, that outlook is extremely important. As a theme, relative monetary policy has promoted the bulk of the FX trends that we have seen develop over the year. Collectively, central bank activity has carried a false sense of security for markets for years to ever more remarkable record highs. It is also crucial from a technical perspective. The Dollar marked a key bullish break this past week when it hurdled 94 and broke a 'neckline' on its large head-and-shoulders pattern.
Since last week's break - provoked appropriately by the ECB's policy announcement and the tumble from EUR/USD - the Greenback has made no meaningful effort at follow through. Lingering just on the other side of a high profile technical break erodes the markets anticipation and capacity for follow through. Then again, the hawkish pace that the Fed is likely to maintain via its status quo approach would reinforce its unique advantage over the likes of the European and Japanese banks. A close eye should be kept on the policy statement that accompanies the decision looking for rhetoric that solidifies the December hike, speaks to the 2018 pace of policy and perhaps make official an infrequent reference to market excess which threatens the stability of the global financial system. Further, distractions will be readily available in the form of US President Donald Trump announcing his pick for the next Fed Chair, a heavily anticipated BoE rate decision and more. What should we take away from this event and how can it help/hinder the Dollar? That is the focus of today's Strategy Video.
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