As strange as it sounds, the tone of trade for the rest of the week, and perhaps even the rest of the year, could hinge on just two words. The Federal Reserve will release its monetary policy statement and summary of economic projections at 2:00pm ET (19:00 GMT), followed by the press conference with Fed Chair Janet Yellen at 2:30pm ET (19:30 GMT), and traders will be hyper-focused on whether the central bank chooses to leave or remove the “considerable time” [before any interest rate hikes] pledge from its statement.
Though the Fed will try to talk down the significance of these two words either way, the market’s reaction will likely hinge on the presence or lack of the “considerable time” pledge. If the statement remains, it will suggest that the central bank is concerned with the recent wobble in global financial markets, and the dollar could sell off as a result. On the other hand, the removal of the phrase would show confidence in the strength of the US recovery and likely lead to a corresponding rise in the world’s reserve currency.
The Fed’s actions are particularly hard to handicap heading into this month’s report because economic data and market expectations have diverged. US economic data of late has been generally strong, highlighted by a blockbuster NFP report two weeks ago and strong coincident economic indicators recently; this favors the removal of the “considerable time” phrase. Despite this solid data however, traders are skeptical that the Fed will be hawkish. The benchmark U.S. 10-Year yield has fallen to below 2.10% (though the shorter-term U.S. 2-Year yield has ticked up modestly to 0.57%) and according to the CME Group, futures traders are not pricing in a rate hike until the Fed’s September 2015 meeting, a full nine months from now.
Our general rule of thumb is to defer to market-based measures of expectations, as these represent traders putting hard money at risk, rather than just an armchair economist spouting predictions with no accountability; in this case, traders are hinting that the Fed may remain dovish this afternoon, and that the dollar may fall as a result.
Technical View: GBP/USD
Cable is one of the more interesting currency pairs heading into today’s Federal Reserve fireworks. After a false breakdown below key support at 1.5600 last week, the pair has now broken above its 5-month bearish trend line. In addition to the trend line break, the RSI has also moved to a multi-month high around 50, suggesting that the recent trend will change, but not that an uptrend will immediately form. Instead, rates may simply move sideways within the established 1.5600-1.5800 range in the short term.
That said, a dovish Fed could push the pair above the 1.5800 barrier, opening the door for a more substantial rally toward 1.5900 or 1.6000 heading into the end of the year. Alternatively, the removal of the “considerable time” phrase could be seen as a bearish development for GBP/USD, and rates may quickly drop back down to test 1.5600 support.
Source: FOREX.com
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