Will The Fed Keep The “Dot Plot” Unchanged?

 | Sep 20, 2017 14:27

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Today, all eyes will be on the highly-anticipated FOMC policy decision. This is one of the “bigger” meetings, meaning that besides the rate decision we will also get fresh economic forecasts, an updated “dot plot”, as well as a press conference by Chair Yellen. According to the Fed funds futures, the financial community is almost certain that policymakers will keep interest rates unchanged, something we agree with given that inflation remained broadly subdued in the aftermath of the latest meeting. Even though the CPI rates rebounded a little in August, we doubt such a minor recovery will be enough to ease the concerns of policymakers around inflation.

We think the market will place most of its emphasis on any potential changes to the “dot plot”, and subsequently, on any signals regarding the beginning of balance sheet normalisation. We expect the “dots” to continue to signal another hike this year. We did get some dovish comments from voting FOMC members recently, but we suspect that most of those officials already have their “dots” set to signal no more hikes this year. As for the pace of future hikes, we believe they may keep it untouched as well and wait to see whether the latest rebound in inflation will continue. In case the “dots” are left broadly unchanged as we expect, the dollar could gain. With regards to the balance sheet, market chatter suggests the Fed is very likely to signal that this process may begin in October. The risk here would be the Committee postponing this announcement.

EUR/USD slid somewhat yesterday following the report citing ECB sources (see below), but was quick to recover and trade even higher. During the Asian morning Wednesday, the pair emerged above the key barrier of 1.2000 (S1), something that may have opened the way for another test near the 1.2100 (R1) resistance hurdle. Nevertheless, even if the pair trades higher ahead of the FOMC decision tonight, we see the likelihood for a retreat in the aftermath as we expect the Committee to keep signaling one more hike this year. As such, if the pair is trading near 1.2100 (R1) ahead of the decision, it could fall back down to 1.2000 (S1) thereafter. Having said that, as long as the rate continues to trade above the medium-term uptrend line taken from the low of the 17th of April, we would treat such a retreat as a corrective phase of the broader upside path.

Euro spikes lower on ECB-related reports

The common currency briefly pulled back yesterday, after Reuters reported that concerns over EUR strength are leading to uncertainty and divide within the ECB Governing Council. Sources familiar with the ECB suggested that policymakers disagree on whether or not to set a firm end-date for bond-buying in October and that some want to keep the optionality of extending or expanding asset purchases if needed. Focus now turns to tomorrow’s ESRB (European Systematic Risk Board) conference, where speakers include President Draghi. Even though these events are usually more academic in nature, any further hints from Draghi that the Bank may be headed for a “dovish tapering” could work against EUR.

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BoJ: A more upbeat tone?

During the Asian morning Thursday, the BoJ will announce its own policy decision and expectations are for this Bank to take no action as well. We see the case for the BoJ to appear more optimistic than previously, considering that ever since the latest meeting, the nation’s CPI rates rose further, the unemployment rate declined, and economic growth accelerated. Besides upgrading its language, we believe that the Bank may even revise up its economic forecasts. JPY could gain on the news, but given the overall risk-on sentiment lately (evident by record highs in the S&P500), any positive reaction may remain short-lived.

USD/JPY traded slightly higher on Tuesday but hit resistance near 111.80 (R1) and during the Asian morning, it retreated. Nevertheless, given that the rate is still trading above the 111.00 (S1) key support level, we consider the short-term outlook to be positive. A Fed “dot plot” pointing to one more rate hike by year-end could encourage the bulls to shoot and test once again the 111.80 (R1) resistance. A break above that level could initially aim for the 112.20 (R2) line, marked by the peak of the 26th of July. The pair could retreat somewhat overnight following the BoJ decision, but as we already noted, we expect such a slide to be only brief and short-lived.

As for today’s economic indicators

The only noteworthy indicator today is the UK retail sales for August. Expectations are for both the headline and the core rates to have ticked down, something that could weigh on the pound somewhat, at least on the news.


EUR/USD