Fed Chair Janet Yellen has generally held steady on the hawkish side in outward commentary. However, with US stock markets trading at record levels and the US Dollar Index (DXY) selling off to twelve month lows, markets aren’t taking her expectation of a more hawkish strategy too seriously, especially after her comments sounded a touch more dovish when she visited congress two weeks ago. The US Dollar Index, which measures relative Dollar strength across the major currency pairs, is at 12 month lows driving the Dollar broadly lower in global currency markets.
Since June, Yellen’s public comments have titled slightly more dovish without indicating any change from an expected tightening over the medium term. Yellen has recently suggested that “the exact timing doesn’t really matter” on rates, which suggests a move in September could be a target, although it leaves some scant probability of a July announcement. Lately, it seems what is more important is what the Fed thinks the market expects, and most market dialogue seems to center on September and beyond.
One key indicator traders continue to monitor is the Fed’s “dot plot”. The dot plot is shared by the Fed after each meeting to show where each member thinks rates should and will be and it is a key piece of information which moves markets today based on future expectations. Short term currency traders will want to monitor the dot plot coming out of this meeting to measure any change in expectation for forward rate hikes, as hikes are generally seen as bullish for a currency.
Based on recent labor market data, we might expect a light upgrade to the FOMC assessment of the labor market, especially with the last jobs report, but it is challenging to form any expectation for an uplift in the growth outlook. For markets, assuming there is no surprise in the rate decision, the focus will be on the inflation language and any changes there. Another point of focus, especially for equity markets, is the status of the Fed’s balance sheet, and what proper expectations should be for that to begin to unwind.
Of special note as we move through the meeting and the rest of the week will be the re-emergence of the conversation around growth with Q2 GDP being released later in the week. A higher than expected GDP print could be bullish for the Dollar for short term currency traders.
While traders need to be prepared for anything, including a surprise rate announcement, considerable effort should be spent considering the prospect for a relatively uneventful Fed Meeting and its impact on the Dollar in foreign exchange markets. The Fed meeting could provide a platform for multiple directions in the price of the dollar across several crosses, which provides a variety of potential options for a trading strategy.