As I’ve mentioned in my Monthly Economic Review for the U.S. Economy, the upcoming FOMC statement might make or break the dollar’s forex trends. After all, the U.S. has been outperforming most of its peers and market participants are simply waiting for the Fed to acknowledge that the economy can survive with less stimulus.
This has been going for quite some time already and expectations keep running higher with every Fed statement. However, Fed head Yellen has been trying to keep rate hike speculations in check by being extra careful with their forward guidance and reminding everyone that there’s still a lot of work to be done before achieving full economic recovery.
In their previous rate decision, FOMC policymakers mentioned that they “can be patient in beginning to normalize policy” which Yellen later on clarified to mean that they are unlikely to hike rates in the next couple of meetings. She added that they would proceed on a meeting-by-meeting basis and that they would provide clear clues when they think that economic conditions might warrant tightening.
With that, forex market watchers are hopeful that this upcoming FOMC statement would contain strong hints that the Fed is indeed moving closer to a rate hike. In particular, the removal of the phrase “can be patient” in their forward guidance could be interpreted to mean that the U.S. central bank is likely to increase interest rates after a couple more Fed meetings.
The U.S. dollar might be able to extend its long-term rallies in this scenario, which would confirm that the Fed is the only central bank ready to hike rates while others are holding on to their dovish bias. This could be a lot like the time when the Fed decided to drop the “considerable time” wording in discussing how long interest rates might remain low, which kickstarted the Greenback’s rally earlier this year.
On the other hand, if the Fed decides to stick with its “patient” rhetoric, forex traders might start doubting that the central bank would actually hike rates sometime this year. Dollar bulls could get really disappointed and force the Greenback to return some of its recent gains. Apart from that, the prospect of having low U.S. interest rates for much longer could wind up boosting risk appetite, driving equities and higher-yielding currencies up the charts.
Do you think the Fed will sound a bit more hawkish this time and spur more dollar rallies? Or are we about to see a “buy the rumor, sell the news” situation during the event?