FOMC Event Risk: How Will the Market React


USD, Fed Price Analysis & News

  • Fed Event Risk: Highlight of the Week
  • Will the Dot Plot Shift to a 2023 Rate Hike?

All Eyes on the Fed

The Federal Reserve meeting will be the highlight of the day and week, marking the last chance for some FX volatility before the summer lull kicks in. With today’s decision unlikely to chuck up any surprises in terms of policy, the focus will be on the dot plot projections as well as the Fed’s statement, including Powell’s presser.

Dot Plots: Firstly, the dot plots released at the March meeting showed 7 members expect the fed to raise rates, up from the previous of 5, while 11 members saw interest rates remaining unchanged in 2023. Therefore, 3 more members will need to shift their outlook to see the median dot-plot projection move to a 2023 rate hike. As it stands, Fed Fund Futures has priced in two rate hikes by 2023, which is unlikely to be matched in today’s dot plot projections.

Will the Dot Plot Shift to a 2023 Hike

FOMC Event Risk: How Will the Market React

Going into the meeting, it does appear rather balanced as to whether the Fed dot plots shift towards a 2023 rate hike, which in turn is likely to see good two-way risks. My view is that the dot plots will shift towards a 2023 rate hike as the economy continues to recover. In turn, such an outcome is likely to see a knee-jerk move higher in the USD. However, should the FOMC refrain from shifting the median dot plot projections (with only 1 or two members shifting) we can expect a similar initial reaction that had been seen in March.

USD Reaction to FOMC

FOMC Event Risk: How Will the Market React

Source: Refinitiv

Forward Guidance: Since the last FOMC meeting, inflation has risen to 5% with the core figure at 3.8%. However, taking a closer look at the details, the upside in inflation has largely stemmed from factors such as used cars, which is likely to embolden the Fed’s view that inflation is transitory. Alongside this, supply bottlenecks have also been a factor in pushing CPI higher. The debate over whether inflation is transitory or not, won’t be resolved for many months and therefore it is unlikely that the Fed will blink now. That said, following the most recent CPI figure, the statement below may be altered.

With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longerterm inflation expectations remain well-anchored at 2 percent.”

The Fed’s current guidance on asset purchases is “Substantial Further Progress”, a condition that needs to be reached before the Fed looks to taper asset purchases. That said, with recent employment readings slightly disappointing expectations and given that the Fed has been placing greater focus on the labour market relative to inflation, I expect the Fed to maintain the current guidance. Removal of the word substantial, however, as subtle as it may be, would likely have a substantial impact. But for now, I expect the Fed to remain patient and instead wait until the Jackson Hole Symposium.

FOMC Positioning: Heading into the meeting, pre-FOMC positioning has seen the USD drift higher, while the 10yr yield pushed off the lows (1.42%) towards 1.50%. In turn, this does suggest that the market are slightly positioned for a hawkish surprise.

Option Implied Move

FOMC Event Risk: How Will the Market React

Full report on USD volaility

Source: Refinitiv