Traders are eagerly awaiting the Federal Reserve’s monetary policy, and it is highly likely that we may not see much action in the stock market ahead of this event. It is natural for investors to adopt a cautionary tone ahead of this event; after all, it is one of the most important events when it comes to the U.S. stocks, forex, and commodities.
The Expectations
Investors are largely expecting that the Fed will strike a dovish tone today. The reason for this is that the Fed has introduced a new monetary policy chapter at the Jackson Hole in order to tackle inflation. So, they are expecting the Fed to keep the rate unchanged, and no action is expected of them today. But this doesn’t mean that this event isn’t going to elevate volatility. In fact, this particular event is likely to set the trading tone for the rest of the week and possibly for the month.
Caution
The element of surprise could come from the Fed, and I think it is highly likely that it may happen because markets have started to think that the Fed has adopted an ultra-dovish monetary policy. I believe the Fed can control the narrative by just upgrading its growth forecast for the economy. Higher growth forecast alone is going to be sufficient to fuel the dollar rally, and we could see massive capitulation of dollar short trades. This has been the reason that we have seen some significant weakness in the dollar index over the last number of weeks.
What About The Dollar?
Yesterday, there was some improvement in the dollar index, and investors bought the dollar because of the better than expected economic data. The Empire manufacturing data advanced much greater than expected, confirming that the gradual recovery is only becoming better and it is moving in the right direction.
Investors are also paying attention to one key element: how the increase in the coronavirus cases is associated with the new lockdown measures and the influence of this on the economic activity. We have learned so far this month that despite a small surge, there haven’t been any restrictions announced, which has supported economic activity. The evidence of this is in the Empire manufacturing data, which jumped from 3.7 to 17—this is a massive jump.
Is There an Opportunity Here?
First of all, it is likely that we are going to see higher volatility today. To begin with, we have the U.S. retail sales number due, which will be released before the Fed meeting. The retail sales number is likely to move the U.S. stock futures, Gold price, Euro/dollar, Sterling-dollar, and anything that trades against the dollar. However, the move may be short-lived as investors aren’t likely to bet big based only on them.
As mentioned earlier, investors would like to know the Fed’s monetary policy stance. Hence, later in the day, we could see a complete reversal of the trend or perhaps the continuation of the same trend.
The bottom line is that if the Fed keeps their monetary policy stance unchanged and brings out no surprise for the markets, it is likely the dollar may continue its downward move. On the flip side, if there is a surprise from the Fed, we are likely to see a lot of chaos in the U.S. equity markets, more bullish bets for the yellow metals as investors may think that the Fed is getting ahead of itself.