FOMC preview: will the Federal Reserve spark further dollar downside?
The FOMC meeting looks unlikely to bring any major policy shift, yet traders will be watching keenly amid sharp dollar declines.
The Federal Open Market Committee (FOMC) is once again set to turn heads this week, with another two-day virtual meeting set to conclude on Wednesday 29 July.
US economic recovery starts to stutter
Despite US President Donald Trump's incessant criticism of the Federal Reserve (Fed) throughout his tenure, there is no doubt that the FOMC have taken impressive action in a bid to lessen the economic damage from the pandemic. While this has provided a 'V-shaped' recovery for stocks, we are already seeing signs of the economic rebound over the past week.
From a PMI perspective, we are seeing the US underperform against Europe, with the services sector in particular seeing six straight months of contraction as the reopening process falters. From an employment perspective, we have also seen the first rise in weekly jobless claims since late March.
However, with the second quarter (Q2) gross domestic profit (GDP) figure due on Thursday, the coming weeks will provide plenty more information to inform the Fed.
With a number of states backtracking on previous reopening efforts, it is likely that the US economic recovery will continue to stutter until we see a Covid-19 vaccine or treatment that allows a return to normality.
Unfortunately, the US government looks likely to lower the funding for the approximately 30 million unemployed citizens, which is touted to potentially fall from $600 per week, to just $200. That would represent a huge decline in income for millions of Americans, stifling demand and spending.
What to look out for
While the FOMC likely to see the risks ahead for the US economy, we are unlikely to see any tangible shift to monetary policy. Markets are currently pricing in a 94% chance that there will be no change to monetary policy. Instead, the committee are likely to focus on forward guidance, as they await the decisions on a government level.
As such, this month is likely to be about what the Fed might do in the event these initial signs of weakness turn to become a bigger issue. That focus is expected to signal a willingness to maintain rock-bottom rates, while the FOMC are also to reiterate their willingness to maintain asset purchases despite the gradual reduction seen since implementation.
One potential strategy that remains up in the air is the yield curve control policy implemented by the Japanese. For now that policy seems unlikely, yet it could become more worthy of consideration if we saw borrowing costs rise down the line.
Will the dollar decline continue?
The greenback has been hit hard over recent weeks, with the dollar index hitting a fresh 22-month low today. This downtrend has been ramping up despite having seen substantial downside over the past month.
The break below 9454 points towards a wider bearish outlook being in play, and up until now we have not seen any reason to believe that this is going to come to an end. With the price heavily oversold, the stochastic oscillator could provide us with a key signal.
A break through the 20 threshold could provide us with a potential sign of impending upside. Until then, further downside looks likely for the dollar.
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