Inflation and interest rate are top of the agenda of this week’s announcements.
On Wednesday the Federal Reserve announces its decision on US interest rates for June, followed by the Bank of Japan on Friday.
This particular Fed announcement is a special one because it comes with the release of the FOMC policymakers’ updated economic projections, which are printed only four times each year. This provides a clearer picture of the Fed’s assessment and outlook for the economy, which then gives forex traders a better idea of when the central bank might adjust monetary policy.
The last time the Fed released their projections was in March when they were still feeling optimistic about economic performance and before they got their hands on bleak Q1 data. The debate as to when US interest rates will rise appears to be reaching a climax. According to Financial Times, inflation hawks are warning of the dangers that a prolonged period of low interest rates could pose, while doves argue that wage growth and overall inflation need to be higher to justify a rate rise.
The last time the Fed released their projections was in March when they were still feeling optimistic about economic performance and before they got their hands on bleak Q1 data. Back then, Fed officials predicted that the economy would expand between 2.3% to 2.7% in 2015 and 2016 while estimating that the unemployment rate would fall to 5.0% to 5.2% this year. They also projected that core inflation would be around 1.3% to 1.4% this year then climb to around 1.8% next year.
Consumer prices have fallen this year and that is pushing analysts to back the doves this time, so rates are expected to be held where they are.
As I updated yesterday, oil prices are expected to remain in low levels for next year which indicated the US dollar will remain strong regardless.
This time, FOMC policymakers might try to manage market expectations once again by lowering their forecasts for growth, hiring, and inflation. After all, several big banks and major financial institutions have downgraded their estimates for the U.S. economy in the past months, taking the recent slump into account. Yellen likes to keep things balanced anyway, and she might use these projections to remind everyone that a September rate hike isn’t guaranteed.
Further insight into the monetary situation in the US will be available on Thursday with the release of inflation data for May.
Volatility is expected to go crazy during the statement on Thursday but the market’s longer term direction will be set afterwards once all the noise has calmed down.
Unless Yellen suddenly announces that she is cutting rates (very unlikely) I’m sticking with my bullish USD trades with out without an interest rate hike.