Article about the upcoming Fomc statement, Due out Tomorrow.
We already know that nothing will change, but it could still effect the USD, (may be wise to take profits or hold off til after release)
This is cut and paste from Kathy Lien who works for FX360 and has written a couple of books on Currency trading.
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How the U.S. dollar trades for the remainder of the year will be
largely dependent upon the outcome of Wednesday’s Federal Reserve
monetary policy announcement. Over the past 2 weeks, the dollar has
strengthened significantly and the central bank’s degree of hawkishness
will determine whether the dollar will break its 3 month high against
the euro. The sharp moderation in job losses and improvement in
consumer spending will cause the Federal Reserve to grow more
comfortable with the outlook for the U.S. economy. However there are
still plenty of reasons why the Fed may not want to appear overly
hawkish and therefore quite a bit of uncertainty rests with tomorrow’s
FOMC statement. Although we believe that the Fed will underwhelm,
dollar bulls may not need much to be satisfied and therefore any subtle
changes to the language of the FOMC statement could affect how the
dollar trades. A more upbeat tone by the Fed would be positive for the
dollar while skepticism about the sustainability of the improvements in
the labor market or consumer spending could reverse the greenback’s
recent gains.
The 3 things that investors will be looking for tomorrow
will be the tone of the FOMC statement, changes to the discount rate
and any plans to end emergency programs. We only expect the bare
minimum from the Fed because they realize that at this critical
juncture in the U.S. recovery, there are more consequences than
benefits to being overly hawkish. Now let’s take a look at these 3
questions in further detail:
1) What will be the Tone of the FOMC Statement?
The Federal Reserve provided very little optimism and very little
action when they met on November 4th. At that time, the central bank
was weary of a jobless recovery and losses in the commercial real
estate sector. They were also mindful of the risks associated with a
weak dollar and low interest rates. Since that meeting, the U.S.
economy has improved. According to the table at the end of this
article, the labor market has taken a turn for the better along with
consumer spending and confidence. Inflationary pressures also
accelerated, while asset prices increased. However the latest
non-manufacturing ISM report indicated that activity contracted last
month. Given that the service sector represents more than 70 percent of
the U.S. economy, the slowdown is certainly worrisome. The
manufacturing sector, which previously led the recovery, is also
slowing. Furthermore, less than 36 hours after the non-farm payrolls
report was released, Fed Chairman Ben Bernanke gave a speech warning
about the risks facing the economy which suggests he is not convinced
the improvements are here to stay. Therefore we expect a slightly more
hawkish but still very cautious tone from the Fed which should help the
dollar extend its gains. However the reaction in the dollar should be
tempered by the strong likelihood of the Fed repeating the well worn
statement that interest rates will remain “at exceptionally low levels”
for an “extend period.”
2) Will the Fed Raise the Discount Rate?
Spurred by an article today’s Financial Times about the
upcoming FOMC rate decision, there is now speculation that the central
bank could raise the discount rate. In our view this is extremely
unlikely because we expect the Fed to first announce plans to unwind
some of their emergency measures before taking this relatively bold
move. Raising the discount rate, which is the rate that regional Federal Reserve banks lend to commercial banks
would carry with it hawkish monetary policy connotations. It also
would be at odds with the Fed’s commitment to keep interest rates low
and plans to taper off asset purchases. However the fact that the
Financial Times has raised this option reflects the growing division
within the FOMC. Certain Fed officials are more hawkish than others and
we expect the division on monetary policy to increase as the economy
continues to improve.
3) Will the Fed Announce Plans to Unwind Emergency Measures?
Given the Federal Reserve’s commitment to slow their pace of
asset purchases over the next few months and to complete their program
by the end of the first quarter, we expect the central bank to step up
their plans to unwind emergency measures. There is a good chance that
they will also end other emergency programs and any specifics on this
front should also be positive for the U.S. dollar.
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