Are you ready to trade probably the most awaited economic calendar this week?
I’m talking about the Fed’s monetary policy decision on Wednesday!
Here are the main points you need to know if you are planning to trade in the event:
Focus on the event:
Federal Open Market Committee (FOMC) Monetary Policy Statement
When will it be released:
June 14, Wednesday: 6:00 PM GMT
Fed Chair Powell will conduct a press 30 minutes later.
Use our forex market hours tool to convert GMT to your local time zone.
Expectations:
- The Fed keeps the federal funds rate range steady at 5.00% – 5.25% (CME Fed Monitoring Tool Sees probability of 75.8% as of June 12)
- The Fed will introduce new forecasts and “dot” economic projections
- Chairman Powell likely to embrace the “hawkish skip” and hint at more rate hikes as soon as the next meeting
Relevant US data since the latest FOMC statement:
Arguments for Tight Monetary Policy / Bullish Dollar
S&P Global US Services PMI For the month of May: 54.9 vs. 53.6; “The sharp rise in new business since April 2022”; “Fee inflation declined from April but was the second-fastest rate since September 2022 and sharper than the long-term series average.”
non-farm jobs For May: +339K (expected +180K) vs. +294K revised in April; the unemployment rate rose to 3.7% (expected 3.5%, prior 3.4%); Average hourly wage: +0.3% (+0.4% forecast/previous)
On May 25th, Fed Governor Christopher Waller He said Thursday that he doesn’t think the Fed should pause until we see clear evidence of slowing inflation conditions.
On May 22, the head of the Federal Reserve Bank James Pollard Support for two more rate hikes for 2023
primary gross domestic product Q1 2023 reading: 1.3% q/q; The price index came in at 4.2% qoq (4.0% qoq forecast) vs. 3.9% qoq
Basic PCE For April: +0.4% m/m (+0.3% m/m expected) vs. +0.3% m/m prior; +4.7% p.a. vs. 4.5% p.a. expected
Consumer price index In April: +0.4% m/m (+0.3% m/m expected) vs. +0.1% prior; +4.9% yoy as expected vs 5.0% yoy previously
retail For April: +0.4% m/m (+0.7% m/m expected) vs. -0.7% m/m
Industrial production For April: +0.5%m/m (forecast -0.1%m/m) vs. 0.0%m/m prior
🔴 Arguments for easy monetary policy / bearish dollar
on June 2 Federal Reserve official Harker He noted that consumers aren’t spending as much as they used to, so it’s time to stop in June
Federal Governor Jefferson He indicated on June 1 that the Fed may skip a June rate hike while still open to the option of a later rate hike.
Standard & Poor’s Global Manufacturing in the United States Reading for the month of May: 48.4 compared to 50.2 in April
Federal Reserve Quarterly Senior loan officer survey He indicated respondents’ expectations of tighter credit conditions, lower customer demand, and more credit tightening likely throughout the year.
On May 19th Fed Chairman Powell He said that the policy rate may not need to rise to achieve the goals due to the tightening of credit conditions in the banking sector
On May 16th Thomas ParkinThe Richmond Fed president said he wanted more evidence that inflation is slowing and would support raising interest rates further if the data showed the need.
On May 15, Fed officials Kishkari and Gosby Both interest rate policy refers to caution due to credit and price pressures
Previous issues and the impact of the risk environment on the US dollar
May 3, 2023
USD Pairs Overlay: 1-Hour Forex Planned by TV
Action / Results: As expected, the Fed raised rates by 25 basis points to a range of 5.00% – 5.25%, which is the FOMC members’ “final rate” specified in their March outlook.
Chairman Powell also said that the Fed will rely on data going forward, which traders considered dovish.
The US dollar rallied higher on the release but then started trading lower on the next 15-minute candle. The Dollar finally hit intraday lows against all of the major currencies except the Japanese Yen.
Risk Environment and Internal Market Behaviors: A combination of mixed labor market numbers, regional bank contagion fears, and recession fears dragged the greenback into a bearish trend for most of the week.
The effective interest rate hike initially gave the dollar a boost, but the dovish nature of the decision gave greenback traders license to extend the greenback’s intraweek bearishness into Friday.
March 22, 2023
USD Pairs Overlay: 1-Hour Forex Planned by TV
Action / Results: As expected, the Fed raised interest rates by 25 basis points to the target range of 4.75% – 5.00%, citing tightening bank lending conditions as one of the reasons for not raising rates.
FOMC members did not change their forecast for the point, but the new forecast showed that they expect higher economic inflation and less gross domestic product And Unemployment rate in 2023 compared to the December forecast.
The Fed raised interest rates by “only” 25 basis points and shifted its tightening bias from “Continuous rate increases would be appropriate“for”Some additional policy validation may be appropriatewhich translated into a “peaceful rate hike” during the US session.
Risk Environment and Internal Market Behaviors: Markets were emerging from banking tensions and coordination of central bank actions on Monday. This made it easier to sell the US dollar and buy the “riskier” bets when the markets took a “pessimistic rally” from the Fed event.
The US dollar fell sharply across the board upon the release of the statement, but retained its weakness against safe havens before the end of the day.
price movement probabilities
Possibilities of feeling risky: Easing concerns about the US debt ceiling, banking sector and global growth have pushed “risk” assets higher since the beginning of the month.
Traders are likely to remain on the sidelines, until the US CPI report could shift expectations on the FOMC decision, meaning that the US CPI data could have an impact on broad risk sentiment itself.
After that, we will get the big event of the FOMC decision on Wednesday to shake the risk sentiment again. Continuing risk sentiment for the rest of the week will likely depend largely on whether the Fed pauses or hikes, and how much the Fed’s forward guidance differs from market expectations.
The latest monetary policy decisions from the European Central Bank and the Bank of Japan are also on the schedule, but they are unlikely to have a significant impact on broad risk sentiment unless we get a major surprise from either event.
US dollar scenarios
Base case: As with the last three decisions of the FOMC, the Fed can do what markets expect; This time around, it expects to keep interest rates steady at a range of 5.00% – 5.25%.
Writing in his press release, Powell likely recognizes the aggravating effects of tougher banking standards and destroying demand from ever-rising consumer prices.
But to discourage rate cut speculation, Powell could also point to uncomfortably high inflation and hint at more rate hikes this year. It is also likely to bolster the Fed’s price point expectations of not raising interest rates until 2024.
Based on the high expectations of the pause, the history of USD declines when expectations are met, and if the USD saw broad gains ahead of the FOMC decision, there is a good chance we could see profit-taking on dollar longs again in the event release if expectations are met again. other..
Overall, this is an event where it makes sense to wait for the FOMC statement and press conference before making a directional bias on the USD.
Not only can we get unexpected rhetoric (particularly from the FOMC press conference), but directional moves that have taken place over the next session at least in the last two releases, which means there is potential to pick up a large chunk of pips with more certainty/conviction in direction after knowing all the information.
Alternative scenario: The Fed could take cues from the books of the RBA and BoC and surprise the markets with a 25bp rate hike (CME Fed Watch sees a 24.2% chance of a 25bp increase from June 12th)
You know, for the drama…but it’s more likely to confirm the central bank’s commitment to controlling Uncle Sam’s hyperinflationary environment and using a consistently strong business environment as justification.
In this scenario of a sudden interest rate hike, the US dollar may jump more against currencies with less hawkish central banks such as the Japanese yen, the Swiss franc, and the British pound. But it is likely to make gains against all major currencies if risk sentiment worsens and the Fed hints at further gains ahead.
