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Currency Analyst since 2010

Barclays expects hawkish FOMC

The Fed will announce its decision at 18:00 GMT. The following press conference will start at 18:30 GMT.

There are 4 components to today FOMC’s announcement:

1. Decision on QE tapering

Barclays’ view: The Fed will taper its asset purchases by $15B. A larger taper will lead to a sharper selloff in long-term rates and weigh on EM/high-carry currencies versus the USD and vice-versa.

2. Decision on unemployment threshold (the Fed’s interest rates will stay low until the unemployment rates falls below this level)

Barclays’ view: No change on the forward guidance component is likely to be USD positive, especially against G10 currencies, given the sensitivities of these to the short end of the yield curve.

3. Update on the Fed's economic forecasts

Barclays’ view: The FOMC forecasts may show a median target FF rate of 3% for end 2016, closer to but below long-run level of 4%. Given the current market pricing of 2.1% at end-2016, this should come as a hawkish surprise to the market. The announcement of end-2016 forecasts will have a larger effect on the short end of the yield curve, and hence USD positive versus G10 currencies.

4. The tone in Chairman Bernanke’s press conference.

Barclays' view: The chairman is likely to underline the conditional/state-dependent nature of forward guidance and indeed Fed forecasts. This may serve to dampen the market response in the short term; however, a strong underlying growth picture, improving labor market conditions and progress on inflation all mean that the medium-term appreciation trend in the USD is intact.

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