The Federal Reserve is set to release their interest rate decision and forward guidance today in the middle of a busy week. The market does not expect a rate hike or a change in the balance sheet reduction plan. However, investors will certainly be looking to hear what the Fed will say about the future of rate hikes and whether or not the panel will continue to be hawkish in regards to the economy. Their post-meeting statement will be crucial given that President Trump mentioned his displeasure with the Fed’s rate hike plan especially after Chair Powell announced during his semiannual Congressional testimony that the Fed will continue to increase rates every three months.
Luckily for the Fed, the latest GDP figure released last week showed an annualized quarterly growth of 4.1% and yesterday's release of the PCE Deflator figure, the best gauge of inflation according to the Fed, printed above 2% in line with the Fed’s target. The exceptionally high economic growth witnessed alongside the historically low unemployment rate justify our confidence that the Fed will maintain their hawkish approach and hint on two more rate hikes before the end of this year.
Given the above, we believe that the Fed will dodge President Trump’s remarks and maintain their bullish stance. As such, we expect the U.S dollar to extend yesterday's move to the upside and strengthen against all the major currencies. At the top of our watchlist is the Dollar/Yen, with prices hovering around the 112 area a continued hawkish approach from the Fed should drive the currency pair towards the 113 mark. The Euro/Dollar is of particular interest as well, the shared currency dropped below 1.17 overnight so increased Dollar demand will take the price towards the 1.1620 lows again.