Fed Dovish Statement Expected After December Hike

Global Economic conditions have deteriorated in 2016 making the projected 4 Fed rate hikes a unlikely scenario

The U.S. Federal Reserve delivered the much-awaited first rate hike to start a tightening monetary policy cycle in December. Weak economic indicators and a struggling global stock market after the Chinese turmoil at the start of the year make the projected 4 rate hikes in 2016 look farfetched. The drop and recovery of oil prices have had a deep impact as commodity currencies outperform one day, only to give gains back the next day as volatility is fuelled by global record production and a lack of cooperation between producers.

The CME FedWatch tool points to a 85.7 percent chance the Fed will keep the rate on hold at 0.50 percent. The Federal Open Market Committee (FOMC) will release its statement on Wednesday, January 27 at 2:00 pm EST. There is no press conference scheduled with the eyes on the market to be focused on any changes on the language of the statement. Given current market conditions language that alludes to volatility and hints about its more dovish stance could be present in the FOMC statement.

U.S. Federal Reserve to Use Statement No Actions in January

Given the volatile market conditions at the start of the year that saw a return of safe haven flows in particular to the JPY and Gold the verbal interventions of major central banks has helped calm investor sentiment and has put risk back on the trading agenda. The USD continues to enjoy the backing of the major economy with the best growth outlook although the pace of growth will dictate the number of interest rate hikes delivered by the central bank.

2016 is a Presidential election year in the United States. A process that started with multiple candidate debates is starting to ramp up with the coming of the first primaries in Feb and that will culminate with the major election on November 8. For the final phase of the election cycle the Fed is more likely to sit in the sidelines to avoid influencing one political platform over the other. This is one of the factors that from the beginning questioned the Fed’s ability to deliver 4 rate hikes, even with a steady recovery in place. Given the tepid start of the year there are forecasts that call for 2 rate hikes and even those are subject to a downgrade given the state of the global economy.

The market has been focused on oil pricing as production is a record high with no clear uptick on energy demand. U.S. inventories will be published ahead of the FOMC with a potential to derail some of the conversation focused on interest rates and focus on what the Fed intends to do in regards to U.S. economic growth.

USD events to watch this week:

Wednesday, January 27
10:30am USD Crude Oil Inventories
2:00pm USD FOMC Statement
2:00pm USD Federal Funds Rate
3:00pm NZD Official Cash Rate
3:00pm NZD RBNZ Rate Statement
4:45pm NZD Trade Balance
Thursday, January 28
4:30am GBP Prelim GDP q/q
8:30am USD Core Durable Goods Orders m/m
8:30am USD Unemployment Claims
Tentative JPY Monetary Policy Statement
Friday, January 29
12:00am JPY BOJ Outlook Report
Tentative JPY BOJ Press Conference
8:30am CAD GDP m/m
8:30am USD Advance GDP q/q

*All times EST
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza