Expectations are running high for an upbeat FOMC statement this week, but will this be a classic case of “buy the rumor, sell the news” in the forex market?
A quick review of the U.S. dollar index reveals that the currency has been on a tear for almost an entire month, as forex traders cashed in on improving U.S. economic data and the possibility of earlier Fed rate hikes. After all, Fed Chairperson Janet Yellen did mention in her Jackson Hole Summit testimony that the U.S. central bank is open to tightening earlier if “progress in the labor market continues to be more rapid than anticipated.”
However, the same chart reveals that the USDX is testing an established resistance area, which has been holdin’ like a boss over the past couple of years. With that, the upcoming FOMC statement could determine whether the Greenback can extend its rallies or if it will retreat from its current levels.
In particular, market watchers will be paying close attention to the Fed’s interest rate forecasts, as some believe that policymakers would drop the phrase on keeping rates low for a “considerable time” after easing ends. If so, dollar bulls could charge as markets start to price in rate hike expectations for the first quarter of 2015.
Bear in mind though that Yellen does have a penchant for keeping market expectations in check, which suggests that she is likely to downplay hawkish forecasts during the press conference after the actual FOMC announcement. As always, she will probably remind everyone that the U.S. economy still has a long way to go before achieving full recovery and that policy adjustments will continue to be data-dependent.
Forex market participants might also be able to draw more clues from the Fed’s economic projections, which could contain positive revisions in GDP and employment for this year and the next. Apart from that, the Fed is expected to carry on with their $10 billion monthly reduction of asset purchases and confirm that QE will officially end next month.
All in all, the sentiment for the September FOMC statement is generally upbeat, but these expectations have been priced in a long while back. Even if the Fed statement is as expected, there’s still a good chance that profit-taking could drive the dollar lower in the short term before reestablishing its longer-term trend. Are you planning on taking any dollar trades for the FOMC statement?