The FOMC decision (June 16, 6:00 pm GMT) is shaping up to be the main event for this week, so better start prepping if you’re gonna trade this top-tier catalyst.
Here’s what happened before, how the dollar reacted, and what’s expected this time.
No bombshells in April FOMC meeting
The previous FOMC statement didn’t exactly rock the markets’ socks off, as the U.S. central bank kept interest rates unchanged and Powell refrained from sharing taper plans.You see, market expectations for a reduction in stimulus had been riding pretty high then since the U.S. economy had seen some green shoots.
There were a few upbeat remarks on price pressures, but officials were quick to note that these were likely due to transitory factors. The statement also acknowledged progress in the vaccination rollout and how this has allowed economic activity to strengthen.
However, policymakers reiterated that they’d like to see “substantial further progress” when it comes to inflation and employment before making any adjustments.
Because of that, the Greenback’s reaction was understandably bearish but muted, as dollar traders had been expecting something more exciting from the Fed.
Powell to dodge taper talk, but inflation upgrades eyed
This week’s FOMC announcement comes with updated economic projections, and many are eyeing positive revisions to inflation forecasts.Recall that both the CPI report and core PCE price index, which is said to be the Fed’s preferred inflation measure, posted upside surprises for May.
However, policymakers might once again caution that these price pressures are transitory and can’t be sustained without full employment. Based on the past couple of NFP releases, the labor situation ain’t lookin’ too good.
With that, Fed head Powell would likely stay mum about their timeline for tapering asset purchases.
Watch out for dot plot changes
Market watchers might turn their attention to the updated dot plot forecasts of interest rate changes instead, as some committee members might be slightly more hawkish this time.In particular, some officials could adjust their rate hike forecasts earlier, possibly bringing the median estimate for the first increase to early 2023. Combined with possible inflation upgrades, this could be a bullish scenario for the Greenback.
Increased emphasis on weak employment data, on the other hand, could overshadow the pickup in inflation and downplay taper hopes.