Expectations For The September FOMC Meeting
September FOMC meeting today is expected to see the Fed reducing rates by a further 25 basis points. When the Fed last eased its headline policy rate in July, Powell noted that policymakers deemed the rate cut to be “Mid-cycle adjustment” and not the beginning of a length easing cycle. It is worth pointing out that since that juncture, global conditions have weakened and subsequent commentary from the Fed chair have noted the likely need for further easing. Given the weaker global conditions since the July meeting, and in line with easing from other central banks, the base case scenario is now for a further 25 basis point cut.
At the July meeting, Powell highlighted a list of items which the Fed would need to assess in order to approve further rate cuts. These items included global growth continuing to slow, trade wars continuing to intensify and inflation expectations continuing to trend lower. Each of these criteria have certainly been met since July, as well as there being signs that the jobs market has weakened along with consumer conditions having worsened. Special attention will be paid to how Powell addresses these items as this could be a clear indication as to whether the Fed intends to ease policy again in Q4.
Along with the Fed’s assessment of current and expected conditions, the market will also be looking to the dot plot for guidance. In this regard, I expect to see some further downward movement in projected rate levels. This poses upside risks for USD as, if the dot plot doesn’t forecast a further 50 basis points worth of cuts this year, the impact of a 25 basis point cut at this stage could be stifled.
Dot Plots & Outlook The Key
Remember, with the dot plot forecasts, each policymaker is asked individually, based upon their outlook for growth, unemployment and inflation, what the Fed’s policy rate should be by the end of the year. Consequently, those policymakers not in favour of a cut at the July meeting, or at the September meeting now, could place dots projecting 50 basis points of hikes from this point, which would keep the median forecast higher, keeping USD bid supported.
However, Powell’s outlook could create downside pressure for USD if the Fed chair reiterates his message from the Jackson Hole Symposium where he elucidated on “significant” downside risks to the US economy. Although there have been some improvements in the trade war landscape with US and China, the market is yet to receive details of anything concrete and the risk of talks collapsing remains elevated.
In summary, we can expect the Fed to ease policy by the anticipated 25 basis points. The primary focus will be on Powell’s outlook and forward guidance. If Powell stresses downside risks, in line with his Jackson Hole comments, this should keep the market focused on further policy easing this year, leading USD lower. However, If Powell strikes a more reserved tone, this could lead to a long squeeze in USD position bring price down.
Technical & Trade Views
USDJPY (Bullish above 1.0665, targeting 109.60)
From a technical and trading perspective. In the wider scale view, USDJPY has posted a potential double bottom off the yearly S1 and has since traded up through the bearish trend line from 2019 highs. With VWAP supportive I am now looking for this move to continue though I am looking for a retracement lower to establish a higher low (preferably against the monthly pivot) to position longs looking for a move up to the yearly pivot at 109.60. On the other hand, if price spikes higher on the FOMC and works through offers around the yearly pivot I will monitor any retest from above for bullish reversal candles targeting a further expansion higher.
Please note that this material is provided for informational purposes only and should not be considered as investment advice. The views discussed in the above article are those of our analysts and are not shared by Tickmill. Trading in the financial markets is very risky.