How Will the FOMC Impact The Dollar?

The big focus this week is on the September FOMC meeting which concludes today. The event holds the potential to create a lot of market volatility and is drawing a great deal of attention. The hawkish shift among FOMC policymakers over the summer has seen Fed tapering expectations increasing. However, recent data weakness as well as negative global risk events are casting some doubt over whether USD bulls will get the signal they are looking for.

Bullish Case

In the bullish camp, traders are looking for the Fed to give a clear signal that tapering is coming this year. Currently, the market is looking for November as the most likely time for the Fed initiating tapering. Bulls argue that the broad recovery in the economy, the progress with vaccinations and the anticipation that the outlook has improved, mean that the Fed risks running an inflationary overshoot if it waits too long on tapering.

Bearish Case

In the bearish camp, traders argue that the US recovery is clearly faltering. Recently, the jobs market has been stuttering, inflation has been falling and GDP has been weaker-than-forecast. With deaths and hospitalisations still rising, there is also a lot of uncertainty over the path the pandemic will take through the colder months meaning that any tightening in financial conditions might be premature until next year.

The Fed itself has been struggling with the issue. While Powell has recently acknowledged that tapering this year is likely appropriate, he has yet to give any sort of timing indication. Given the proximity to the final quarter of the year, this month’s meeting seems a strong candidate for the Fed to give a signal. If it does, this will likely lead USD firmly higher in the near term as traders begin to anticipate a forthcoming rate hike.

Dot Plots Are the Key

Focus will also be on the update dot plot forecasts. Any upward revision to these will also be a firm driver for upward prices in USD. Alternatively, if the Fed yet again refrains from offering any clear signal on timing, or if we see little to no revision in the dot plot, this will likely fuel an unwinding of USD in the near term. Indeed, given that tapering is well expected at this point, the bigger market moves are likely to come from any significant changes in the dot plot forecasts.

Technical Views

Dollar Index (DXY)

The rally off the 92.07 lows in in the DXY has seen the market trading back up to retest the underside of the broken bull channel and the 93.40 level. For now, the area is holding as resistance, however, with both MACD and RSI turned higher here, the focus is on a further push higher towards the 93.91 level next.