Tuesday’s US consumer price index (CPI) data printed at 2.8 per cent for the twelve months through to May, its highest level since February 2012, while the year-on-year figure for core CPI was 2.2 per cent, its highest print since February 2017. Those numbers will only reinforce the view that later on Wednesday the Fed will again hike US interest rates by 25 basis points. But if the rate hike is essentially nailed on, what could the Fed possibly do that would move markets? What should currency traders be looking for when the Federal Reserve Open Market Committee (FOMC) releases its decision at 1900h UK time. Writing Tuesday, Japan’s MUFG bank said “The Fed’s plans for rate hikes this year are finely balanced between delivering three or four,” noting that “It would only take one more FOMC participant to vote in favour of four hikes to shift the median projection from three hikes.” MUFG doesn’t expect that change to occur but there is a material risk that it could.
Traders will want to keep an eye out for that because such a change would bring the possibility of a hike in September (and December) into sharp focus and arguably give the US dollar a boost. If however the Fed continues to project three hikes in total for 2018, that could well lead to some US dollar weakness especially in pairs, for example USDJPY, where the market perception is that yield differentials have recently supported renewed inflows into the greenback. Traders might also wish to keep an eye out for any tweaks to the Fed’s forward guidance. On May 2, the FOMC statement said ” the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.” On May 31, as previously discussed here on June 7, Fed Governor and FOMC voter Lael Brainard said she felt that forward guidance was “growing stale and may no longer serve its original purpose. ” Traders might wish to pay attention to the detail of the FOMC statement and look out for any change to the number of projected US rate hikes for 2018. Those are what might trigger material post-FOMC market volatility.
Written by Neal Kimberley, External Currency Analyst.