The main trading event this week is the FOMC meeting and we will have the policy decision later today, followed by Fed Chairman Powell’s press conference. Fed funds futures show the odds of a 75 basis point rate hike stand at around 75% and this indicates how the market is positioned ahead of the decision.
The rate hike itself may not be the main thing to watch. Instead, traders will likely be more interested in how the Fed positions its views on the economy and balances that against its determination to beat inflation. I don’t expect us to be in a situation where the central bank is looking to pivot, as there will be more rate hikes in the months ahead.
In case you need a reminder, the fed funds rate is now at 1.50% – 1.75%, so another 75 basis point rate hike will take that rate to 2.25% – 2 .50% with three more FOMC meetings before the end of the year. The end-of-cycle rate is roughly around the 3.50% to 4.00% range, but I’m inclined to think the former seems more likely given the circumstances.
The positive thing for the dollar is that the Fed’s tightening window is not as narrow as that of other major central banks like the ECB and the BOE. This provides some leeway today and I expect policy makers to make full use of it. But any subtle shift in momentum can be enough to turn stocks around and send the dollar spinning the other way. After all, a recession may not be the worst thing for risky trades.
Coming back to the Fed, Adam posted a great overview yesterday here, in case you missed it.
This article was written by Justin Low at www.forexlive.com.