How Are The Decks Stacked Ahead of the FOMC Meeting?

How Are The Decks Stacked Ahead of the FOMC Meeting?

Today is a big day, and all eyes will be on the Chairman of the Federal Reserve, Jerome Powell, who will be announcing the US monetary policy decision on interest rates and the asset purchase programme. Market expectations are that the Fed will not move a muscle during this meeting, and it will leave things as they are. 

Tough Month For the Dollar Index

The Dollar index has been under serious selling pressure throughout this month. Fairly recently, we saw some life spring coming back to the dollar index. However, there are concerns among investors that the recovery in the dollar index may be short-lived as the Fed isn’t likely to make any change in its monetary policy later today. Having said that, some are betting that the Fed’s Chairman may show his hawkish side when it comes to his view of the US economy. After all, the US economy is experiencing accelerating growth.  

Is The Deck Stacked In Favour of a Higher Dollar?

The brief answer is yes, thanks to the US economic numbers. No matter how you look at them, it is really difficult not to pick up the signals. They are bullish. For instance, the US Jobless Claims data is at its pandemic low; house prices are soaring, new factory orders are rising, retail sales numbers are advancing, and US consumer confidence is at the 14-month high. 

The most intriguing part is that the momentum in the economic data hasn’t reached its peak yet, and that is because the economic activity is only getting back on its recovery track. Nearly half of Americans have received their first shot of the Covid vaccine, and the US lawmakers have further eased off restrictions of wearing a mask for those who have received both shots of their Covid-19 vaccine. This means that whenall Americans have received their full Covid vaccine, only then we can say that economic activity could be at its peak. Until then, we are likely to see the US economic data continue to move higher. 

What Could Derail the Dollar Index’s Rally? 

The first factor that comes to mind is the dovish monetary stance that the Federal Reserve has with respect to the US economy. The Fed has made it clear several times that they are in no rush to raise the interest rate or begin the tapering conversation. This is one of the primary reasons that we have not seen the dollar index soaring despite some stellar economic numbers this month. 

In addition to this, there is always the fear of another coronavirus mutation derailing all the economic recovery efforts. We do have evidence of this over in Asia, where some countries have started to bring back more restrictive coronavirus-related measures to curb the virus spread. 

What To Expect From The Fed Today?

Two words, tight lips. The Fed isn’t likely to be overly-enthusiastic about the US economic recovery. Jerome Powell is going to do his best to manage the market expectation by acknowledging that the US economy is experiencing a strong recovery. But he is likely to balance that statement by marring it with concerns of overreacting to such enthusiasm. On balance, the statement could be very neutral. 

For the dollar index, the Fed’s acknowledgment of economic improvement is likely to cushion this month’s losses, but Jerome Powell, keeping things tight could fade early optimism about the dollar. 

The dollar is likely to pick up more strength against currencies like the Japanese Yen, where the Covid situation is becoming worse. However, we may not see big moves against the UK Sterling, where a mass vaccination process is underway. As for currencies such as New Zealand’s dollar and Swiss Franc, we may see little to no change.