It’s FOMC week! Will the Fed raise its rates for the first time this year as forex market players are expecting?
FOMC statement and presser (March 21, 6:00 pm GMT onwards)
The biggest event of the week is Fed Governor Jerome Powell’s first monetary policy meeting this year.
See, investors fully expect the Fed to execute its first (out of three?) rate hikes in 2018. Not only that, but the members will also update their growth and inflation projections!
What’s keeping market bulls and bears at the edge of their seats, though, is the prospect that the current set of voting FOMC members might feel more hawkish than they did in December.
In his testimonies last month Powell already admitted that recent developments (read: tax cuts and increased government spending) will result in both growth and inflation expectations being upgraded. Question is, will they be enough to convince the Fed to raise their rates FOUR times this year?
Take note that a hawkish rate hike won’t necessarily result in a lower Greenback. For one thing, the summary below suggests that some traders have already started buying the dollar, which could lead to a “buy-the-rumor, sell-the-news” situation.
And then there’s the uncertainty surrounding the stability of Trump’s administration. If we see one (or more) key officials get the boot, then investors could shrug off the expected rate hike and we might see more of last week’s selloff.
White House updates
One look at the dollar’s recent charts tells us that exits of key Trump administration officials aren’t doing the Greenback any favors.
Will Trump rock the boat again this week? More importantly, how will investors react to his replacement options?
Last Week’s Price Review
The Greenback’s is apparently on course to closing out the week as a net winner (as of 5:00 pm GMT).
But if you look at the overlay of USD pairs above while taking note of last week’s closing prices (dashed horizontal line), you can clearly see that the Greenback was actually a loser for most of the week (only CAD was a bigger loser) before finally recovering when it got bid higher on Thursday and Friday.
And according to market analysts, the Greenback’s early weakness was due to uncertainty surrounding Trump’s decision to slap tariffs on aluminum and steel, as well as follow-through selling after last week’s NFP report failed to impress, at least with regard to wage growth.
The Greenback’s weakness was exacerbated on Tuesday when Trump announced the firing of Secretary of State Rex Tillerson via a tweet.
Mike Pompeo, Director of the CIA, will become our new Secretary of State. He will do a fantastic job! Thank you to Rex Tillerson for his service! Gina Haspel will become the new Director of the CIA, and the first woman so chosen. Congratulations to all!
— Donald J. Trump (@realDonaldTrump) March 13, 2018
Follow-through selling was limited, though, and the Greenback quickly found support on most pairs and began to trade sideways after that. Heck, not even the retail sales miss was able to entice enough bears to push the Greenback lower across the board.
This ever-present dip demand soon allowed the Greenback to climb higher against its peers on Thursday, even though only mid-tier economy reports were released at the time. But to be fair, those economic reports were mostly positive.
Anyhow, some market analysts say that the dip demand that eventually sent the Greenback higher on Thursday was likely due to traders looking forward to next week’s FOMC statement. In other words, the Greenback was underpinned by preemptive positioning.
The Greenback’s recovery later stalled on most pairs, though, likely because of rumors swirling at the time that National Security Adviser HR McMaster might get the Tillerson treatment.
Nothing really came out of it (for now at least), so the Greenback resumed its uphill trek, with the 1.1% month-on-month surge in U.S. industrial production (+0.4% expected, -0.3% previous) being cited as the main catalyst by market analysts since it supposedly reinforces the idea that the Fed would hike next week.
And with that, the Greenback cemented its lead against the Swissy and the euro. It had no chance against the pound and the yen, though.
At any rate, we’ve got the FOMC statement to look forward to next week, so keep your eyes on the Greenback.