Date: 26 Jul 2017

In terms of rate changes, Wednesday’s Federal Open Market Committee (FOMC) meeting will be a non-event, after June’s hike. Indeed France’s BNP Paribas thinks “weakening inflation is likely to force the [FOMC] to wait for more evidence of it picking up before making another move on rates, and believe Chair Yellen’s possible departure at her term’s end in February 2018 may also be significant, reducing her inclination and ability to sway dissenters and perhaps encouraging her to leave the big decisions to her successor.” The French firm actually now thinks the next Fed hike will not be until March 2018. But just because there won’t be a Fed rate hike on Wednesday doesn’t mean the FOMC is a riskless event.

So what should traders look out for? Citibank feels “the two most important aspects of the July FOMC statement will be (1) if and how the characterization of inflation is revised and (2) whether officials use the meeting to signal that balance sheet reduction will be announced in September.” The US bank adds that, in its opinion, “the statement may more firmly acknowledge that some of the slowing in [US] inflation is persistent, but the committee will continue to express confidence that the 2% target will be achieved. Some indication that balance sheet reduction is forthcoming (e.g. “in the near future” or “in the next few meetings” or “soon”) is likely.” Bank of America Merrill Lynch also thinks the FOMC will tweak its statement to strengthen its commitment to balance sheet reduction while UK bank Barclays wonders if “the statement could point to an announcement of balance sheet run-off for September.” For this FOMC statement, traders may find the devil is in the detail and not in the headlines.

Written by Neal Kimberley, External Currency Analyst.