Market Analysis

Federal Reserve expected to move away from patient stance this week

The U.S Dollar faces a pivotal week on the foreign exchange market, as the Federal Reserve is widely tipped to adopt an easing bias when they meet to decide on U.S interest rates this Wednesday. United States policymakers are expected to cast aside the current wait-see-aside approach and lay out the case for a series of interest rate cuts if deemed necessary.

Recent U.S data has suggested that the American economy has seen a significant slowdown, this alone is likely to prompt the Federal Reserve to strike a much more dovish tone on Wednesday. The better than expected U.S retail sales figure on Friday, which saw a 0.5 percent monthly increase, is unlikely to change the mind of the FOMC, following a downturn in U.S jobs, manufacturing, construction, and consumer confidence.

The Federal Reserve has previously been criticized for acting too slowly when the U.S economy starts to slow, with many economists previously blaming the FED for cutting interest rates to slowly during the 2008 financial crisis. It appears unlikely that the Federal Reserve will make the same mistake this time, especially given U.S President Donald Trump’s intense criticism of Federal Reserve for raising interest rates too quickly.

Aside from the language inside the Federal Reserve monetary policy statement, another key element to watch this week is how FOMC board members actually vote, it is likely that some dissent may be seen. FED voting member James Bullard has been notably dovish towards rates as U.S macroeconomic data worsens, it will certainly be interesting to see if FED Chair Powell and other voting members share his concerns.

The June policy meeting may indeed be laying the groundwork for a July interest rate cut, in order to avoid a disorderly market reaction if policy tightening is needed. The U.S bond market has been sending out the warning sirens that an economic downturn is coming, with the inversion of the yield curve, while the foreign exchange markets have been notably lacking any strong directional trends.

USD/JPY Daily Mountain Chart Source ActivTrader Platform

USD/JPY Daily Mountain Chart | Source: ActivTrader 


The U.S Dollar’s reaction this week may hinge upon how bearish the FED’s policy statement is and the overall sense of urgency to act. The USD/JPY pair has largely looked past the latest bout of U.S Dollar strength and focused upon the recent conflict between Iran and the U.S. The 107.70 level is the key support zone to watch this week, with the 107.40 and 106.60 levels extended support. Any moves higher in the USD/JPY are likely to find strong resistance from the 109.00 and 109.30 levels.


Written by Nathan Batchelor, External Analyst, ActivTrades

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