USD: the Fed needs time to think (video)
By Elizaveta Belugina
Last week US dollar strengthened versus commodity currencies – Australian, New Zealand’s & Canadian dollars. The greenback’s rally versus Japanese yen also continued. At the same time, British pound has managed to show weekly gain, while euro stabilized. Large speculators reduced long USD bets in the latest period after lifting them to 15-month highs in the previous week. Economic data from the US have so far been mixed. Let’s see what the next week got in store.
Firstly, pay attention to the American inflation data on Wednesday. The higher inflation is, the sooner is the Fed’s rate hike and the higher will be the USD. The main event of this week is the meeting of the Federal Reserve accompanied by the economic forecasts of the FOMC members and their press conference. Indeed Wednesday is going to be an intense day for the greenback.
The last time officials met to set monetary policy was in July. Back then they based their decision on the June unemployment rate of 6.1%. In July this indicator rose to 6.2% before sliding back to 6.1% in August. So, there’s no real change in unemployment since the last FOMC meeting. In addition, jobs growth in the US slowed last month.
According to a well-known expert on the Fed, Jon Hilsenrath, who is claimed to have some inside information from the central bank, the pressure on the Federal Reserve to change its policy stance to a more hawkish one at the coming meeting decreased. Hilsenrath says that for the next few months the Fed members may be debating about their view of the labor market and the forward guidance. The hawkish members of the FOMC will keep pressure on Yellen, but she will want to have an agreement within the central bank.
We’ll be watching for 2 things in the Fed’s rhetoric: first is the mention of the “significant under-utilization of labor resources” and second is the reference that rates can remain low for a “considerable time” after QE ends. These 2 phrases are negative for USD. So, traders will watch: will these phrases stay in the Fed’s statement this time or won’t they? If these words stay, the advance of the greenback will be limited. If one of them or they both go, USD will get a positive boost.
All in all, the risk is that the Fed sounds more dovish than expected. So, to sum up, our baseline scenario is that American currency won’t be able to strengthen much and will even weaken.