Saddle up, forex cowboys! The U.S. dollar could be in for one wild ride tomorrow when the FOMC makes its rate statement and declares whether or not they’re ready to tighten monetary policy.
Hold your horses though. An actual interest rate hike ain’t likely to be announced just yet, as the U.S. economy encountered a few road bumps earlier this year and is just starting to get back on its feet. Recall that hiring and spending posted impressive gains in May, which might be enough for Fed head Janet Yellen to go “Ha! I told you so!” after assuring market watchers that the slowdown in the first quarter was just transitory.
Here are a few more things we might hear in this week’s FOMC statement:
1. Changes in economic projections
This particular Fed announcement is a special one because it comes with the release of the FOMC policymakers’ updated economic projections, which are printed only four times each year. This provides a clearer picture of the Fed’s assessment and outlook for the economy, which then gives forex traders a better idea of when the central bank might adjust monetary policy.
The last time the Fed released their projections was in March when they were still feeling optimistic about economic performance and before they got their hands on bleak Q1 data. Back then, Fed officials predicted that the economy would expand between 2.3% to 2.7% in 2015 and 2016 while estimating that the unemployment rate would fall to 5.0% to 5.2% this year. They also projected that core inflation would be around 1.3% to 1.4% this year then climb to around 1.8% next year.
This time, FOMC policymakers might try to manage market expectations once again by lowering their forecasts for growth, hiring, and inflation. After all, several big banks and major financial institutions have downgraded their estimates for the U.S. economy in the past months, taking the recent slump into account. Yellen likes to keep things balanced anyway, and she might use these projections to remind everyone that a September rate hike isn’t guaranteed.
2. Remarks about U.S. dollar strength
Apart from wanting to prevent any sharp moves in the financial markets, Yellen might refrain from giving away too many hints about future rate hikes in order to keep a lid on dollar strength. The Fed already made a few jabs against the Greenback’s gains in the past, saying that further rallies won’t be good for overall inflation.
In my latest Global Inflation Update, I’ve shown y’all how the effects of the oil price slump are slowly starting to fade for some major economies. However, Uncle Sam’s annual CPI has shown a 0.2% decline in April while the core CPI has remained unchanged at 1.8%, which means that the Fed might not greet the U.S. dollar’s gains with a warm welcome.
3. Forward guidance on policy tightening
As always, market participants will be scrutinizing every single word of the Fed’s official statement to identify any changes in wording. Back in March, dollar bulls charged after the FOMC removed the word “patient” when it comes to discussing their timing of policy changes. In the following month, Yellen clarified that not being patient doesn’t necessarily equate to being impatient about hiking interest rates, forcing the bulls to retreat.
Several economic hotshots are expecting the Fed to confirm that they are looking to tighten monetary policy sometime this year but still leave markets guessing when exactly a liftoff might be announced. This could still be a bullish scenario for the U.S. dollar since the Fed remains the only major central bank moving closer to a rate hike, which might take place either in July, September, October, or December.
Either way, dollar pairs could be in for a volatile U.S. trading session tomorrow, as forex traders place their bets on the event’s outcome. If you’re new to all this or if you don’t feel comfortable keeping your positions open ahead of a potential market surprise, there’s no shame in sitting on the sidelines and reassessing your longer-term bias later on.