FOMC May Be Dovish

Fed’s economic projections this Wednesday may not signal a 4th rate hike, potential short USD/JPY after FOMC.

FOMC this Wednesday will create huge volatility across all asset class as not only a decision on interest rates will be announced, it also compasses FOMC economic projections and statements. The market has already priced in a 100% chance of a quarter point hike despite string of economic data that has prompted downward revisions on Q1 GDP estimates below 2% and a slower retail sales figure. The only saving grace is that US economy added 313K jobs last month, service and manufacturing activity expanded, and CPI growth accelerated YoY.

The main focus for this week FOMC will be the monetary policy statement as well as the updated summary of economic projections. There had been speculation of a 4th rate hike for this year as FOMC voters has encourage investors to price in a 90% chance of a 100bps rate hike. However, there is a high possibility that Fed might not signal a 4th rate hike just yet due to 3 reasons:

Raising rates during Powell’s first FOMC meeting aside from his testimony is already seen as hawkish and any signalling of a 4thrate hike would be overdone.

Given the current economic health, it would be astute to keep market’s expectations modest so as to assess the strength of the economy later into the year before warranting a 4th

The odds of a 4th rate hike fell after February inflation report and decent NFP reports. The markets were worried that faster rate hikes could be detrimental to business whose borrowing cost could increase is rates increases.

Even though the flexibility in tariffs whereby Canada and Mexico are exempted and possibility even more countries has revive the risk appetite of investors, instability in the white house and other tariffs could have pressure on the dollar. Rex Tillerson, fired as secretary of state, is the fifth key personnel being replaced in the White House in the short period of 2 weeks.