Unless you’re too busy looking for NFTs to buy, then you’ll know that the Fed is sharing its latest monetary policies and economic projections tomorrow at 6:00 pm GMT.
What do traders expect from the central bank members? More importantly, how might the dollar react?
Here are points to remember if you’re trading the event:
What happened last time?
- Fed leaves interest rates and pace of bond purchases unchanged as expected
- Powell on tapering: “nobody will be surprised when the time comes”
- USD reacted more to “meme stock” speculations during the trading session
As expected, the U.S. Federal Open Market Committee kept its policies and plans unchanged in January.
Governor Jay Powell hinted in his presser that it’s too soon to talk about tapering as he and his team had just released their guidance and would like to see “substantial” progress before they discuss any stimulus withdrawal.
The lack of bombshell from the Fed turned the traders’ attention to “meme stocks” like $GME and $AMC. Specifically, traders worried that losses of large hedge funds that were short would spur liquidation on other high-yielding bets.
The dollar popped to new intraday highs during Powell’s presser and capped the day near its U.S. session ranges.
What are markets expecting this week?
- No changes to interest rates and the pace of bond-buying
- 2021 growth forecasts upgraded from 4.2% to a median of 5.8%?
- Eyes on dot plot projections, Treasury yield comments
Traders aren’t expecting changes from the Fed this week, but they do expect a bit more optimism now that more economic restrictions were eased; vaccinations have progressed, and the Biden admin has passed the stimmy bill.
The increased optimism party puts Powell in a tight spot because he also has to reassure the markets that the Fed will keep the money printed going BRRRR in the foreseeable future.
Treasury yields will also be a hot topic. If you recall, U.S. bond yields have seen notable increases as traders price in the economic recovery (and hotter inflation) possibly pushing the Fed to ease its accommodative policies sooner than what Fed members are publishing.
Unless Powell reassures markets that the Fed can ignore faster inflation long enough to achieve their growth and employment goals, then traders would worry about a “premature” tightening choking Uncle Sam’s recovery.
How might the dollar react?
So far, the safe-haven dollar has been giving up gains from the previous month as traders shrug off vaccine concerns and price in more economic recovery.
If Powell successfully assures markets that the Fed is still not tapering its easy policies anytime soon, then we could see the dollar extend its recent weakness against its higher-yielding counterparts.
But if Powell’s comments hint that at least some form of tapering is on the table, or if the markets say “I don’t believe ya!” to the Fed’s dovish stance, then the Greenback could extend its 2021 gains across the board.
