A Cautious FOMC?? : dovish tail risks abound

US Federal Reserve chairman Jerome Powell is expected to reaffirm his cautious approach to monetary policy this week, potentially paving the way for an extended rally in the Australian dollar.

The Aussie has battled back from below US71¢ less than two weeks ago and is now within reach of US73¢, helped by a muted market response to the latest trade tariff moves by the US and China and the return of a semblance of calm to emerging markets.

With the economic party raging, the Federal Reserve is widely expected to drain some more punch from the bowl,” TD economist Leslie Preston said, adding the central bank appears far from done: “We expect the Fed to hike four more times over the next year, placing the fed funds target at a peak level of 3.25 per cent in 2019.”

The challenge for investors, as it is for Fed policymakers, is more nuanced.

“We suspect the FOMC will signal in its statement the need for policy, moving forward, to potentially become more nimble when it comes to rate hikes compared to the current workmanlike (quarterly) pace,” Bank of Montreal deputy chief economist Michael Gregory. “This could mean longer-than-one-meeting pauses or none at all (the latter becomes easier with the advent of pressers after each meeting next year).

“In any event, we suspect the phrase: ‘The Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labour market conditions, and inflation near the Committee’s symmetric 2 per cent objective over the medium term’, might be modified.

The dot plot – or the specific rate forecasts by individual policymakers – is expected to be little changed for both 2019 and 2020.

“With two US rates hikes priced into [the balance of] 2018 and in the absence of inflation, it’s almost impossible for the Fed to bump up the 2019 curve,” OANDA’s Stephen Innes said in a weekend note.

“So, the markets will end up focusing on shifts in the long ball forecast into 2020 which is not the best or brightest of signals for currency traders who tend to view markets in much nearer time horizons,” Mr Innes said.

Australian Financial Review

By Stephen Innes Head of Trading Asia @steveinnes123

Bring on the FOMC!

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This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Stephen Innes

Stephen Innes

Head of Trading APAC at OANDA
Stephen has over 25 years of experience in the financial markets and currently based in Singapore as the Head of Trading Asia Pacific with OANDA. Stephen's market views focus on the movement of G-10 and ASEAN Currencies. His views appear in Bloomberg, CNBC.Reuters, New York Times WSJ and the Economist. His media appearances include Bloomberg TV & Radio, BBC International, Sky TV, Channel News Asia, ASTRO AWANI and BFM Malaysia. Stephen has an extensive trading experience in Spot and Forward FX, Currency and Interest Rate Futures, Money Market Derivatives and Precious Metals. Before joining OANDA, he worked with organisations like Nat West, Chemical Bank, Garvin Guy Butler, and Sumitomo Mitsui Banking Corporation. Stephen was born in Glasgow, Scotland, and holds a Degree in Economics from the University of Western Ontario.
Stephen Innes