Dollar: Why We Aren't Worried About the Fed - By Kathy Lien
As the Northeast hunkers down for a major snowstorm, forex traders around the world are turning their eyes to the upcoming Federal Reserve monetary policy announcement. How major currency pairs trade will be largely determined by the market's appetite for dollars. While recent stimulus from the ECB and other central banks gives the Fed more leeway, we do not believe they will alter their forward guidance having just changed it in mid-December. If you recall, last month, the Fed replaced its vow to keep rates near zero for a "considerable time" with a pledge to be "patient" on the timing of the first rate hike. At the time, this was viewed as such a hawkish shift that it drove USD/JPY from a low of 116.30 to a high of 120.80 in a matter of days. There has been a few weak data points since the last Fed meeting, most notably retail sales and average hourly earnings but this follows many months of positive economic surprises. The Fed also believes that the decline in oil prices will pick up the slack. If they dialed back their hawkishness, it would risk undermining credibility. The next big meeting is in March so there's no need to rush any changes. If we are right and the Fed provides no fresh insight at this week's meeting, their tightening bias should help the dollar sustain its gains. If they over-emphasize the need for patience, pointing to recent data as reasons, expect a steep slide in the dollar that is driven by profit taking. No U.S. economic reports were released today but Durable Goods, S&P CaseShiller House Price Index, New Home Sales and Consumer Confidence are scheduled for release tomorrow. We are looking for broad based improvements.
As the Northeast hunkers down for a major snowstorm, forex traders around the world are turning their eyes to the upcoming Federal Reserve monetary policy announcement. How major currency pairs trade will be largely determined by the market's appetite for dollars. While recent stimulus from the ECB and other central banks gives the Fed more leeway, we do not believe they will alter their forward guidance having just changed it in mid-December. If you recall, last month, the Fed replaced its vow to keep rates near zero for a "considerable time" with a pledge to be "patient" on the timing of the first rate hike. At the time, this was viewed as such a hawkish shift that it drove USD/JPY from a low of 116.30 to a high of 120.80 in a matter of days. There has been a few weak data points since the last Fed meeting, most notably retail sales and average hourly earnings but this follows many months of positive economic surprises. The Fed also believes that the decline in oil prices will pick up the slack. If they dialed back their hawkishness, it would risk undermining credibility. The next big meeting is in March so there's no need to rush any changes. If we are right and the Fed provides no fresh insight at this week's meeting, their tightening bias should help the dollar sustain its gains. If they over-emphasize the need for patience, pointing to recent data as reasons, expect a steep slide in the dollar that is driven by profit taking. No U.S. economic reports were released today but Durable Goods, S&P CaseShiller House Price Index, New Home Sales and Consumer Confidence are scheduled for release tomorrow. We are looking for broad based improvements.
