FOMC Preview: Dollar Index and USD/JPY Analysis
The FED committee met on Tuesday for their 2 days policy meeting despite a severe winter storm, Stella, which is hitting New York. It shows that they are very eager to hike. Their decision will be announced at 2 PM EST. The FED interest rate decision will also accomplish with FOMC statement and FOMC ECONOMIC Projections or DOT Plot. There will also a Press conference at 2.30PM EST. so we should be ready for a late New York volatile session.
So what we should expect from FED
In December’s DOT Plot, FED promised at least 3 hikes in 2017, if everything remains up to their expectations. As Yellen said before the black-out period that, ”If economic data does not come awfully wrong then a March hike is very much appropriate”. Last Friday we saw that employment is hovering around highest levels since recession and Wages are also ticking up. Today’s Inflation data also should not be a disappointment. So overall US economy is getting better and better. The market is also pricing a more than 90% for a hike on 15th March.
So if FED wants to stick to its promises and want to increase rates then this is their best chance and this is the right also as markets are fully prepared for to absorb this hike. So overall A HIKE IS COMING TODAY.
The main focus of attention will be the DOT Plot. If it shows 3 hikes in 2017 then there is nothing new but if it shows 4 rate hikes in 2017 then it will catch the market by surprise and Dollar will zoom higher. As the market is only ready for 2 or maximum 3 hikes this year. So main reason for a big movement in FX Market will be major CHANGES IN DOT PLOT.
There will be nothing new in the press-conference as Yellen will repeat the same old economic conditions and financial and global risk mantra.
So how this meeting should Impact USD Index
After a strong rally to 103.72 last year and a normal correction to 99.14 levels, now DOLLAR INDEX is in consolidation mode and currently sitting around 101.37 levels. So if FED hikes and DOT plot remains same then we will see a volatile and nowhere to go kind of movement as March hike is already priced in.
If DOT plot changes to 4 hikes this year then Dollar will have a look to this year’s high which is 103.72, in near term, as in other major economies like Euro-Zone and UK are facing major uncertainties in current times and Dollar will work as a safe haven asset. On the technical ground, there is a very good weekly resistance trend line zone in between 103.70 to 104.20 levels. So Dollar can test these levels in near future but chances to go higher than these levels are very low. So there is a very favorable risk- reward for a bet to place against Dollar on these levels.
A quick look at USD/JPY chart
If Dollar gets higher on changes in DOT plot than USD/JPY can jump to 117.50 levels after FOMC and BOJ which will meet on 16th March. But to breach 118.50 levels, it will require a great degree of optimism and it looks highly unlikely, as there are so many uncertainties around in near future like Trump’s economic policies, French elections and Article 50 trigger. Also, financial markets are at all time high. So JPY still looks very lucrative in near future around 117.50 levels.