Expectations Ahead of FOMC

The expectations ahead of tonight’s FOMC event are mainly hawkish, though there are still some downside risks to note. The rise in certain data points such as inflation and manufacturing, has seen bulls dialling up their hawkish expectations. However, the ongoing stickiness in areas such as the labour market and retail sales, seem to endorse the Fed’s view that any lift in inflation over the current period will prove to be transitory and won’t require a shift in approach.

Will Fed Discuss Tapering?

The question though, is whether the Fed’s view has changed? Several Fed policy makers have pointed to the need to discuss tapering and as such, the market expects this conversation to take a more central role in this month’s meeting. With this in mind, the market will be looking to see the extent to which the Fed discusses tapering and if any signals are given. If the Fed points to certain conditions, or even a time line, under which tapering would be necessary, this should be firmly bullish for USD.

Dot Plot Forecasts

Additionally, traders will be looking to the Fed’s dot plot forecasts to see if there are any changes there. In March, several policy makers upgraded their forecasts to project a rate hike by the end of 2023. If more policymakers have joined this view, or if these dots have been brought closer, this should again be firmly bullish for USD.

The ongoing reopening in the US, amidst the continued vaccination progress being made, is putting the Fed in a difficult position. While so far it has fought to downplay rising inflationary risks, on the back of the surge in inflation over May, it seems likely that the Fed will now address the situation at this meeting.

Upside USD Risks

Given the elevated short position in USD, its hard to see any material USD downside resulting from this meeting, even if hawks are disappointed. If the Fed keeps its cards close to its chest over tapering and if the dot plot sits unrevised, we are likely to see a muted USD response but, essentially, risks here feel geared to the upside.

Technical Views

US10Y

The reversal in US treasury yields has seen the yield on the 10Y breaking back down into the bear channel from 2021 highs. The market is currently held at support at the 1.424 level with MACD bearish and the RSI at depressed levels. A hawkish meeting today should see the market accelerating higher again with a break above the 1.584 level targeting 1.685 next.