The Forex market participants prepare for one of the most important economic events this year: the Fed’s next FOMC meeting. What makes it so unique?
Several things do. First, the Federal Reserve of the United States is in the middle of a tightening cycle. It raised the interest rates for the federal fund’s rates from zero to over one percent.
The market sold the U.S. Dollar. A quick look on the EURUSD pair tells you the dollar doesn’t have many friends these days.
It had the same trajectory against the AUD, CAD, and even against the GBP.
Second, the Fed prepares to wind down the balance sheet. While no one believes it will succeed, the Fed did try to communicate its normalization policies.
Finally, it won’t raise rates this Wednesday. At least, that’s a general impression. Still, the meeting is significant for the fate of the US dollar moving forward.
Fed and Forward Guidance
The Federal Reserve is the first central bank to introduce the forward guidance principle. Under it, it pledged to better communicate to the market participants its intentions.
So it did. The idea appealed to other central banks jurisdictions around the world. The ECB, Bank of England, and even Bank of Japan followed suit.
The current message From the Fed is that the quantitative tightening (shrinking the balance sheet) would be a tedious process. To use Yellen’s own words, it’ll be like “watching an oil pain dry.”
I tend to disagree. For in starting such a process, the Fed will be engaged in a two-way tightening process. One that began with the interest rates rising cycle, and the other one that’ll start Wednesday with unwinding the balance sheet.
It’ll be a double positive for the dollar. However, there’s a catch. The info is far from being new. And yet, the dollar tumbled, not rose.
Trump Tax Cuts and North Korean Missiles
The recent weeks saw the Trump’s tax cuts plans and North Korean missiles influencing the Forex market more than any other economic news. Not even the NFP move mattered as the markets discounted it in the days that followed.
If Trump sees the tax-cutting plan approved, it’ll be the third arrow in the direction of a stronger dollar. On the other hand, the reality of a North Korean showdown, limits any risk traders may want to take.
The FOMC meeting and the press conference to follow will end up bringing volatility back to the Forex market. Critical levels currently hold for some time: the 1.20 on EURUSD, 0.80 on AUDUSD and 0.96 on USDCHF.
Expect them to hold still until the press conference. All bets are off shortly after it.