Gather ’round, fellas! The FOMC is set to make its monetary policy statement this week and it could stir a lot of movement in the forex market. Here are some scenarios that might take place:
1. Removal of “considerable time” wording
During the previous FOMC rate statement, dollar bulls were disappointed to find out that the Fed retained its “considerable time” phrase when it comes to discussing how low they plan to keep rates low even after easing has ended. This time around, many are still counting on the Fed to drop this cautious wording and lean towards tightening sometime next year.
If that happens, the dollar might be able to extend its rally against its forex counterparts until the end of the year and perhaps even until the first few weeks into 2015. Having a rate hike bias from the Fed would confirm that the U.S. is ahead of the pack in terms of seeing a sustained recovery, in start contrast to weakening major economies such as the euro zone and Japan.
2. Acknowledgement of labor market progress
If there’s any economic aspect that the Fed is likely to highlight, it’s the consistent progress in the labor market. Just last month, the U.S. boasted of a much stronger than expected NFP reading, as the economy added 321,000 jobs and showed improvements in other underlying employment figures.
Bear in mind that a positive trend in hiring typically results to increased consumer spending, which contributes a huge chunk to overall economic growth. Apart from that, this is good for businesses, as they ramp up production and investment to meet the growing demand.
3. Weak inflation concerns
Even with all the economic improvements in the U.S., the Fed remains very concerned about weakening inflationary pressures, spurred partly by the dollar’s appreciation. For the month of November, headline CPI could show a 0.1% decline after staying flat during the previous month while core inflation could see a mere 0.1% uptick.
The FOMC could project weaker inflationary pressures down the line, as the steady slide in oil prices are leading to lower producer input prices, which then keep the lid on consumer inflation. In November, headline PPI marked a 0.2% decline while core PPI stayed flat. This could keep annual inflation below the Fed’s target, which might then prevent them from switching to a tightening bias and further dampening price pressures.
4. Changes in economic forecasts
Along with the FOMC statement, the Fed is also set to print its revised economic forecasts, particularly for growth, inflation, and employment. Forex market participants are expecting to see upgrades in employment projections for this year and the next, while inflation figures are likely to be downgraded.
These forecasts could shed more light on the Fed’s economic outlook and therefore its monetary policy plans for the foreseeable future. Upbeat projections would indicate that the Fed is pleased with the economic progress in the U.S. and might be more confident to ditch its pledge to keep interest rates low for a considerable time.
5. Timeline on tightening plans
In most of the Fed policy statements, Fed Chairperson Yellen has opted to stay vague about the central bank’s tightening timeline, insisting that any adjustments would continue to be data-dependent. Yellen is expected to stick to this script for now, as she is keen to avoid stoking additional market volatility.
However, market participants are likely to watch the press conference very closely to see if Yellen drops any hints on when the Fed might hike rates. Any indication that the U.S. central bank could start tightening by mid-2015 could spark a strong long-term dollar rally.