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Tomorrow at 6:00 pm GMT the Federal Open Market Committee (FOMC) will publish its monetary policy decision for the month of June.

In addition to that, we’ll also see fresh economic estimates from the group, as well as a presser from Fed Chairman Jerome Powell at 6:30 pm GMT.

Here are a couple of points that you should know before you trade the event:

The Fed is willing to let inflation overshoot its 2.0% target

As expected, the FOMC kept the Fed funds rate target range at 1.50% – 1.75% in May. Members noted that “the labor market has continued to strengthen,” “job gains have been strong,” and that “economic activity has been rising” even as “household spending moderated” from its Q4 2017 pace.

What caught the markets’ attention was the Fed sharing that:

“Inflation on a 12-month basis is expected to run near the Committee’s symmetric 2 percent objective over the medium term…”

This prompted investors to believe that the Fed could let inflation overshoot its 2.0% target without tightening its policies in response. This was confirmed in the meeting minutes where members said that:

“[A] temporary period of inflation modestly above 2 percent would be consistent with the Committee’s symmetric inflation objective and could be helpful in anchoring longer-run inflation expectations at a level consistent with that objective.”

Fed to raise rates “soon?”

Despite the low key dovish remarks, the Fed telegraphed its move by noting in its May meeting minutes that (emphasis mine):

“Most participants judged that if incoming information broadly confirmed their current economic outlook, it would likely soon be appropriate for the Committee to take another step in removing policy accommodation.

Markets think “soon” means “in June”

The CME Group’s FedWatch tool shows that a whopping 96.3% are expecting a rate hike from the Fed this week, while futures data also point to about 91% expecting higher rates from the central bank.

There might be changes to FOMC’s projections

In the Fed’s March projections the 2018 real GDP and unemployment rate forecasts were positively revised, while core PCE inflation was unchanged though the next years’ estimates were upgraded.

March FOMC Projections
March FOMC Projections

Fast forward to today and the latest Q1 2018 GDP reading is pegged at 2.2%; the unemployment rate already hit 3.8%, and the Fed just hinted that it’s expecting inflation to overshoot its 2.0% target. Will we see upward revisions as many analysts are projecting?

Eyes on forward guidance

With a June rate hike a done deal (at least in traders’ minds); all eyes will be on how the Fed members plan to proceed with their policies.

Analysts believe that the Fed is ready to drop its statement that rates are “likely to remain, for some time, below levels that are expected to prevail in the longer run” and admit that its rate hikes since 2015 have taken its policies closer to “neutral” than “accommodative.”

Also keep in mind that the FOMC’s projections also covers forecasts of the next change in the Fed’s fund rate as well as the members’ expected rate changes over the next two years.

Traders will be looking at the “dot plot” chart to see if the Fed will add another rate hike to the three that they’ve already pencilled in earlier this year. The more hawkish market geeks believe we’ll see a total of four in 2018 and another three next year.

The Fed could also step up its normalization game by raising the amount that it would allow to “roll off” its bloated balance sheet by about $10 billion.

Don’t put too much hope on this one, though, since the May minutes reflected that some members were concerned that their unwinding of the balance sheet is tightening money markets more quickly than anticipated especially when paired with the Fed’s existing rate hikes.

TL;DR?

With everyone and his momma expecting a rate hike from the Fed, traders will look at other headlines for volatility.

The Fed could provide catalysts in the form of changes in its rate hike path, economic projections, or even the pace of its normalization.

If Powell and his team signal that they’re confident enough in the economy to tighten however they can, then we might see the dollar gain strength against its counterparts.

But if they pepper their statements with mentions of “downside risks,” or if they signal that they won’t tighten much more in a while, then some traders might take profits from their long dollar trades.