Market Analysis

Fed Preview With A Kuroda Twist

Today’s Federal Reserve policy announcement (1900h UK time) will be a major focus for traders with markets pricing in the near-certainty of another 25 basis point rate hike.  With the rate hike fully priced, trader attention may turn instead to the Summary of Economic Projections (SEP). On September 12, Fed Governor Lael Brainard, whose own stance on rates has evolved over 2018 to become more hawkish, argued that US monetary policy tightening could continue “over the next year or two” rather than the Fed pausing in 2019. Admittedly the rise in US Treasury interest rates this month, ahead of the Fed, has been one of the largest 1-month moves of this Fed hiking cycle, so Fed policymakers might be inclined not to give the new SEP forecast too much of a hawkish tone. Yet with the US economy expanding at a robust pace, and US equity prices at record highs, the Fed might also be inclined to think that the risks to US inflation in 2019 are on the upside. That could lead some Fed policymakers to be more hawkish in their individual rate forecasts. A neutral hike or a hawkish hike might, therefore, be the likeliest outcome. Traders might feel a dovish hike to be less likely given recent US economic data. A neutral-to-hawkish US rate rise might be seen as supportive of the US dollar.  If so traders might be inclined to recall a few lines from Bank of Japan Governor Haruhiko Kuroda’s speech in Osaka yesterday. “Partly because central banks in the United States and Europe are proceeding with monetary policy normalization recently, some market participants speculated that a policy rate hike would take place soon even in Japan. However the situation regarding the price stability target in Japan differs substantially from that in the United States and Europe,” Kuroda said. Kuroda then added that “In terms of clarifying this point, it is very important to make clear that the Bank [of Japan] will maintain the current extremely low levels of short- and long-term interest rates for an extended period of time.” With Kuroda’s comments in mind, traders might rationally conclude that USDJPY could be a prime move if the Fed does deliver a neutral-to-hawkish hike today.

by Neal Kimberley, External Currency Analyst