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Are You Moving Dollars Pre-FOMC?

By Kathy LienForexDec 17, 2018 05:31PM ET
www.investing.com/analysis/are-you-selling-dollars-prefomc-200368871
Are You Moving Dollars Pre-FOMC?
By Kathy Lien   |  Dec 17, 2018 05:31PM ET
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Daily FX Market Roundup 12.17.2018

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.

The last Federal Reserve monetary policy meeting in 2018 is this Wednesday and investors are selling dollars ahead of what is widely expected to be the fourth rate hike this year. Contrary to popular belief, interest-rate hikes are not always good for a currency. Over the past 2 years, the central bank’s well timed moves helped to drive the economy forward, the dollar higher and allowed stocks to hit record highs.

However in the past 3 months, the trend has changed with equities, the greenback and the economy weakening. It started with concerns about the economy, which spilled over to equities and onto currencies. At first, there were signs of slowing in the manufacturing sector, agriculture and housing. Then data worsened, the trade war intensified and investors grew concerned about the country’s ability to maintain its 10-year expansion as the Fed continued to raise interest rates. Equities turned lower at first and when Fed officials shared their concerns about growth, the dollar and yields tumbled. While some investors are selling dollars ahead of the FOMC rate decision, others are waiting to see if Fed Chair Powell will emphasize the proximity of neutral rates over the need for additional tightening. The Fed currently sees 3 more rate hikes in 2019 and how the dollar reacts will largely hinge on whether that forecast changes.

Fed Chair Powell said that interest rates were just below neutral last month but not all of his peers share his view and, more importantly, even if the Fed slows the pace of tightening, it could still be the only major central bank to raise interest rates next year. This possibility is one of the main reasons why some investors prefer to wait until after the FOMC rate decision to sell dollars.

When it comes to trading this month’s Federal Reserve rate decision, there are a few things to consider. First and foremost, investors have fully priced in 25bp of tightening so a hike won’t be a surprise. Secondly, most investors expect the central bank to be less hawkish so if the Fed makes it clear that further rate hikes are needed and there’s still scope for 3 rounds of tightening, the dollar will soar regardless of Powell’s concerns about the economy. Although the Fed forecasts 3 rate hikes, Fed fund futures are only pricing in 1 for next year and this huge misalignment will translate into FX volatility. If the Fed’s dot-plot forecast drops to 2 hikes from 3, the dollar will drop – but the magnitude will depend on the Fed’s tone. There’s no reason for the Fed to talk up rate hikes right now because stocks are falling, yields are slipping and the dollar is weakening. Lower yields and a lower dollar also help to minimize the pain of falling stocks.

USD/JPY, which fell particularly hard on Monday, should test 112.40 pre-FOMC but a move below that level may not happen until after the rate decision. Taking a look at the table below, the economy is not doing as poorly as reflected by stocks and rate-hike expectations and we know that the Fed wants to raise interest rates, just not as aggressively as it anticipated. So barring significant dovishness, any pullback in USD/JPY could be short-lived. Other currency pairs like EUR/USD and GBP/USD are a different story.

USD Data Points
USD Data Points

Are You Moving Dollars Pre-FOMC?
 

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Are You Moving Dollars Pre-FOMC?

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Grant Herman
Grant Herman Dec 19, 2018 6:49PM ET
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Investors looked pretty surprised!
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Janaka Ahaus
Janaka Ahaus Dec 19, 2018 4:26AM ET
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The Fed will probably not raise rates going forward. If they do it's lights out for the USD. Great article thank you again for writing.
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Bolata Cosmin
Bolata Cosmin Dec 18, 2018 9:43PM ET
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what chart? I only see a spreadsheet...
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Janaka Ahaus
Janaka Ahaus Dec 18, 2018 9:43PM ET
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Build your own chart from the data
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Erik Esparza
Erik Esparza Dec 18, 2018 11:15AM ET
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Nice chart Lien...
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Kasemsak Chunhaboonyatip
Kasemsak Chunhaboonyatip Dec 18, 2018 7:10AM ET
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Thank you
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Dwain Hobbs
Dwain Hobbs Dec 18, 2018 3:43AM ET
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Fair assessment,, guess if the outcome is dovish as many expect will it be the Trump factor or the economy ?
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Muhammad Ali chaudary
Muhammad Ali chaudary Dec 18, 2018 3:11AM ET
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thanks ,for your information ...it's really helpful
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-Awon- My
-Awon- My Dec 17, 2018 11:09PM ET
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Thank You, great info sharing
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Rofek Zainuri
Rofek Zainuri Dec 17, 2018 9:54PM ET
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Tank you...
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Charanjeet Sandhu
Charanjeet Sandhu Dec 17, 2018 9:52PM ET
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Your philosophical research shows you studied every sector. Marks on your marksheet now depends to watch levels of USDJPY 112.40.For a forex trader a best concluded findings.
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Shuman Lama
Shuman Lama Dec 17, 2018 8:30PM ET
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you words are simple yet informative. m loving it
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Max Tor
Max Tor Dec 17, 2018 8:20PM ET
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what about usdcad
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Ellon Lon
Ellon Lon Dec 17, 2018 7:58PM ET
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thank you..
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Stephen Mkandawire
Stephen Mkandawire Dec 17, 2018 7:56PM ET
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thank you
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Rick Shumate
Rick Shumate Dec 17, 2018 7:56PM ET
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The Fed needs to go bye bye! Q. Gold standard. Economic reset one and two forthcoming soon.
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Brett Hoerr
Grateful55 Dec 17, 2018 7:37PM ET
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Thank you !
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Arturo navarrete nava Arturo navarrete nava
Arturo navarrete nava Arturo navarrete nava Dec 17, 2018 7:32PM ET
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Agree! Ansolutely, btw thanks
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Bằng Nguyễn
Bằng Nguyễn Dec 17, 2018 7:19PM ET
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Thanks
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