USD Eyes FOMC On Perceived Policy Divergence
Dailyfx | Jan 28, 2015 11:59AM ET
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- GBP/USD on better footing than EUR/USD before FOMC.
- Expect NZD/USD to be particularly volatile with RBNZ today too.
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With the US dollar sitting near 11-year highs versus the Euro, it would be logical to arrive at the conclusion that market participants are expecting a hawkish Fed to rule to the central bank roost in 2015.
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After all, the Fed’s most recent dot plot projections point to a 0.75% main rate by the end of 2015 -- equivalent to two rate hikes. Yet market participants don’t agree.
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The Fed funds rate as well as the overnight index swaps are pointing to a late-Q4’15 rate liftoff, which would only bring the Fed’s main rate to 0.50% by year-end. This discrepancy between the Fed's guidance and what's been priced into the market is worth monitoring.
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Will the Fed take notice of recent market forces (falling inflation expectations, low sovereign yields, and plummeting energy costs) and embrace a more dovish outlook that the market is expecting? -- or, perhaps worse yet, will the Fed maintain its policy trajectory, forcing traders to reprice their expectations altogether? Either way, one party is wrong here.
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Today’s FOMC statement, given the apparent misunderstanding between markets and the Fed, could be particularly caustic as reality comes crashing back to earth -- either for the US dollar (the Fed pushes back its own rate hike expectations) or for equity markets (the pricing in of sooner than expected rate hikes).
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See the above video from technical considerations in EUR/USD, GBP/USD, AUD/USD, and NZD/USD.
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--- Written by Christopher Vecchio, Currency Strategist
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