With the sharper-than-expected slowdown in global economic growth and muted inflation pressures, Fed is likely to lower projections during this FOMC. Short USD/JPY?
FOMC to update the Summary of Economic Projections (SEP) this week
During the Federal Open Market Committee (FOMC) interest rate decision this week, Fed is widely expected to keep interest rates unchanged within the 2.25-2.50% range. Fed is also tasked to update the SEP which will be pared back due to the recent Fedspeak that highlighted a slowdown in global economic growth and muted inflation pressures.
Inflation is low with consumer price growth easing from 1.9% to 1.5% last month. So even if the central bank finds the uptick in confidence, wages and economic activity encouraging, low inflation gives them the flexibility to hold off tightening until there are signs of consistent strength in the economy.
Below is the SEP from December’s 2018 FOMC:
If Fed were to lower the forecast for the growth and inflation outlook this week, which is likely due to “increased of risk to the downside”, this will encourage profit-taking for dollar bulls. Furthermore, Fed may tone down their forward guidance after hiking aggressively in 2018 and may adopt a more cautious tone as the Trump administration struggles to reach a trade deal with China.
On the other hand, if ongoing projections for a longer-run interest rate of 2.75% to 3.00% remains, dollar will continue to bull higher.
The FOMC may also unveil plans to taper the $50/month in quantitative tightening (QT) as Chairman Jerome Powell asserts that ‘the Committee can now evaluate the appropriate timing and approach for the end of balance sheet runoff,’ and a material adjustment in the monetary policy outlook may produce headwinds for the US dollar amid indications of a policy error.
Our Picks
EUR/USD: This pair may rise towards 1.14 as a dovish FOMC could pressure dollar.
USD/JPY: This pair may fall towards 110.80 as a dovish FOMC could pressure dollar lower, encouraging profit-taking from dollar bulls.
SPX/USD: This pair may rise towards 2867 after breaking a six-month resistance.
XAU/USD: This pair may rise towards 1320 this week.
Fullerton Markets Research Team
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