US FOMC Interest Rate decision and the BLS Nonfarm Payroll reports are focuses for the week. With the Fed set to hike yet another 25 basis point, we should see plenty of demand for USD but unless there is a surprise of either overhike or no hike, we should stay out of the market as trades have already priced this rate hike in long before the announcement.
2:00pm US FOMC Interest Rate Forecast 1.00% Previous 0.75%
DEVIATION: 0.25% (BUY on 1.25%; SELL on 0.75%)
Let’s take a look at the last FOMC Statement as our basis for today’s FOMC Statement.
February 1, 2017 – FOMC Statement Analysis
Information received since the Federal Open Market Committee met in December indicates that the labor market has continued to strengthen and that economic activity has continued to expand at a moderate pace. Job gains remained solid and the unemployment rate stayed near its recent low [revised from”unemployment rate has declined”]. Household spending has continued to rise moderately while business fixed investment has remained soft. Measures of consumer and business sentiment have improved of late [new comment]. Inflation increased in recent quarters but is still below the Committee’s 2 percent longer-run objective [DELETES “partly reflecting earlier declines in energy prices and in prices of non-energy imports”].Market-based measures of inflation compensation remain low [revised from “have moved up considerably but still are low”]; most survey-based measures of longer-term inflation expectations are little changed, on balance.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, labor market conditions will strengthen somewhat further, and inflation will rise to 2 percent over the medium term [revised from”expected to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further”]. Near-term risks to the economic outlook appear roughly balanced. The Committee continues to closely monitor inflation indicators and global economic and financial developments.
In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1/2 to 3/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a return to 2 percent inflation.
In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. In light of the current shortfall of inflation from 2 percent, the Committee will carefully monitor actual and expected progress toward its inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.
The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, and it anticipates doing so until normalization of the level of the federal funds rate is well under way. This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions. Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Patrick Harker; Robert S. Kaplan; Neel Kashkari; Jerome H. Powell; and Daniel K. Tarullo. [4 presidents rotated in/out]
To sum it up, Fed is acknowledging various improvements in consumer and business front, plus considering recent hawkish tone out of chair Yellen, there is a very strong case for a rate hike today.
With the above in mind, here is what we should do for today’s rate decision:
- On a rate hike – We should remain put. No trade as it is already priced in.
- On an unchanged decision – Sell USD because the market is expecting a hike. USD should drop sharply and I’d recommend BUYING EURUSD and GBPUSD.
- On an 50 basis point hike – The Fed is more hawkish than expected, USD will remain strong and I will SELL EURUSD or BUY USDJPY and hold on to the trade for days.