FOMC meeting: Rate hike a “done deal” but what about inflation?
Matt Weller, CFA, CMT June 12, 2018 4:22 PM
The kickoff to the World Cup is less than 48 hours away, but before getting to that widely-watched celebration, traders will be tuning into a high-stakes performance of another kind: tomorrow’s Federal Reserve Meeting.
Ever since former Fed Chair Ben Bernanke’s introduced “communication policy” as a tool for influencing markets, the central bank has sought to telegraph its changes in monetary policy well in advance. Assuming the central bank sticks to the script this time around, another 0.25% interest rate hike is a virtual certainty. Indeed, the market-implied odds of such a move are above 96% according to the CME’s FedWatch tool, so an interest rate hike is already “priced in” to current market prices.
That said, the wording of the accompanying statement, the quarterly Summary of Economic Projections (including the infamous “dot plot” of FOMC members’ interest rate expectations), and Fed Chair Powell’s accompanying press conference could all exert a substantial impact on markets. Specifically, traders will be looking for signs that the central bank is growing increasingly wary of rising price pressures, especially in the wake of this morning’s Consumer Price Index (CPI) report, which showed prices rising 2.8% year-over-year, the highest rate in 75 months. If Powell and Company pay more heed to signs of inflation heating up, investors will likely view the meeting as hawkish and increase bets on two more rate hikes this year (September and December).
An under-the-radar event risk from tomorrow’s meeting is the chance that Chairman Powell announces that the Fed will be holding a press conference after every one of its meetings, instead of the current schedule of one press conference per quarter. The market could read this development as hawkish, as it would increase the number of “live” meetings each year; indeed, the US dollar saw a quick spike after the Wall Street Journal reported that Powell was weighing that idea earlier today.
Speaking of the greenback, the dollar index is testing its highest level in a week after tentatively breaking out of a possible “bullish flag” pattern today. A more hawkish meeting, through a rise in the “dots”, more concern about inflation, or the announcement of more press conferences, could see the dollar index rise back toward its 11-month high near 95.00. On the other hand, another noncommittal, steady-as-she-goes interest rate hike (and little else) could disappoint some dollar bulls and take the greenback down toward last week’s trough in the lower-93.00s.
Source: Trading View, FOREX.com
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.