Governor Powell and his team will be under the spotlight this week!
Can they help the dollar recover some of its losses?
If you’re planning on trading the FOMC event tomorrow at 6:00 pm GMT, then you better read up on these important points!
What happened last time?
- Fed leaves interest rates and asset purchases unchanged as expected
- Fed’s dot plot shuts down speculations of late 2022 rate hike
- FOMC members emphasize the temporary nature of high inflation
As expected, the U.S. Federal Open Market Committee (FOMC) kept its policies and plans unchanged in March. Governor Powell and his team also revised their estimates to reflect higher GDP and inflation and lower unemployment in 2021.
What markets didn’t expect was for FOMC voting and non-voting members to continue voting against a rate hike in the near future.
Back in December, only one member saw a 2022 rate hike while five members saw higher rates in 2023. Traders thought that improved economic prospects would encourage enough members to vote for a rate hike maybe in December 2022.
Not so! March’s dot plot revealed that only four members voted for a 2022 rate hike and seven (out of eighteen) see rate hikes in 2023. Yikes!
The prospect of a strong economy and cheap money for longer encouraged risk-taking and dragged the safe-haven dollar lower across the board.
What are markets expecting this time?
- No changes to interest rates and asset purchases
- Fed to highlight its patience and dovishness
Traders aren’t expecting policy changes from Powell and his gang this week.
What they do expect is for Powell to remind us that nope, they still not raising rates just yet.
JPow will likely recognize the positive impact of vaccinations and business reopenings, but also repeat the risks of another wave of reinfections or a stronger COVID-19 variant. He can even talk taxes and remind us that there are still a lot of unemployed workers to consider tapering or tightening any time soon.
How might the dollar react?
MarketMilk tells us the dollar has lost value against its major counterparts in the last month.
If Powell succeeds in communicating his team’s dovishness despite the improved economic conditions, then we could see the dollar take more hits against the “riskier” currencies.
But if Powell starts hinting about tapering asset purchases, or if traders pay more attention to Biden’s capital gains tax plans, then the safe-haven dollar could recover more of its monthly losses.