All eyes are on the Federal Reserve meeting today with the announcement of their monetary policy decision. It is such a big event that we are going to see the influence of this not only in the fixed income space, but also in the currency and equity markets. Basically, everything is going to see the effect of the Federal Reserve’s monetary policy decision. With that in mind, it is important to mention that market players aren’t expecting any new action during this meeting, as the Fed is likely to leave things as they are for the time being, but the language used by them is going to matter a lot.
So far, the Federal Reserve has made its position very clear that it isn’t concerned about the current surge in inflation, as it believes that this is only a transitory matter. Market players have had a very different view about this. However, more recently, they have begun to understand that the surge in inflation could be a short-term matter. This particular factor has calmed market nerves, and there is less chances of a taper tantrum now. However, tapering is going to take place one day, and it is likely that traders will show their discomfort just like we saw it back in 2013.
The Fed’s decision about winding down their coronavirus related support is very much dependant on economic readings. So far, these economic numbers have been giving somewhat mixed signals. For instance, if we focus only on the recent economic readings such as the US retail sales number, one can see why the Fed is no rush to make any hasty decision. The US retail sales number were underwhelming, and in fact, it raised many alarm bells for many traders as they have started to ask a question that could there be something to worry about that they aren’t aware about it. This is because the US Retail Sales number are mostly considered as the most naked form of US consumer spending, it tells us how deep consumers are willing to dig in their pockets. A weak number shows a lack of confidence among consumers, and that is something that no one wants to see right now. In addition to that, if we look at the manufacturing number, it also printed a feeble reading, it grew at its weakest pace in nearly 3 months.
It is quite interesting that despite these feeble economic readings, the dollar index didn’t lose much of its momentum yesterday, and in fact, it is still holding on to its recent strength. Of course, the big question for traders and investors is how much more strength we are going to see for the dollar index today. We believe that the prospects of disappointment from the Fed are quiet strong today. The Fed is very much going to follow the footsteps of the ECB, and it will do its best to avoid the taper word in their conversation.
Jerome Powell, the Fed Chairman, is likely to emphasise that the consumer demand and job growth over the last few months have been lacklustre, but he may balance that statement by saying prospects for an economic recovery are strong. But that doesn’t mean that the Fed is ready to pull back on their support, as he wants to see much more improvement in the economic numbers before he makes any tapering decision.
Thus, the main focus among the market players will be the Fed dot plot. Last time, we saw a split of 11 to 7 among the policy members to hike the interest rate in 2023, but now, it is broadly anticipated that the forecast may shift to tighten the monetary policy next year. The move in the dollar index is going to be dependent on two events, first it will be the dot plot projections and second the press conference. If the fed acknowledges, that the economic recovery exceeds current anticipations, we could see a strong rally in the dollar index and vice versa.