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The Federal Open Market Committee interest rate decision later today is expected to generate extreme market volatility as traders and investors position themselves for a number of trades during the first-fiscal quarter.
Today’s hot topics are going to be inflation and tapering. Any notion that the central bank will cut or raise rates is almost completely out the question, given the general uncertainty towards the United States economy due to the ongoing spread of COVID-19.
The FOMC interest rate decision and policy statement will be issued around 1900 GMT later today, followed around thirty minutes later by Federal Reserve Chair Jerome Powell’s press conference, which is almost guaranteed to be a market mover as journalists grill the FED Chair about the US economy.
Australian bank and investment services provider, Westpac, are expecting the US central bank to give a downbeat assessment of the US economy. This could cause US bond yields to sell-off, alongside the US dollar currency.
Westpac have issued a report on what they except from today’s meetings, in which they note that recent United States economic data has been poor, and pandemic risks remain at highly elevated levels.
Furthermore, the bank expects that the FOMC will likely strike a more optimistic tone towards the US economy now that the Democrats have control of the US Congress, and that the prospects for more fiscal stimulus are now much improved as the vaccine deployment in the US has begun.
They also say that this potential optimism from the US central bank should not be confused with a change in policy stance. Analyst at Westpac expect that the FED will strongly commit to further accommodative policy, so that to make sure the ongoing US recovery does not mature before full employment is reached, and inflation is back at their target level.
Finally, the central bank is expected to touch upon inflation at this meeting. Analysts at Westpac believe that the Chair Powell will say that risks to employment and inflation remain to the downside during 2021.
My feeling is this will cause the US dollar to sell-off against a basket of top currencies, as inflation remains a key theme that the traders and investors have been fixated on over recent weeks. This may also cause global stocks to push higher.
In terms of the bond market, I expect a fairly muted reaction, with bond yields starting to creep somewhat lower. It is fair to say that the market may read too much into Chair Powell’s upbeat comments about the US recovery, however, pushing back inflation expectation will remain a big drag on bonds.
These potential trades all the have the ability to reverse if the release of US PCE inflation figures come in stronger than expected later this week. Food and energy inflation is starting to show up, and when the Federal Reserve finally acknowledges this, the market will almost certainly react accordingly.
In summary, expect the US dollar index to weaken if the FED do talk down inflation, and stocks to continue to push higher, and bonds to marginally sell-off. For commodity traders, oil may pop higher, while silver, gold, and indeed copper may catch a slight bid against the US dollar.
