FOMC preview: economic forecasts and new inflation policy to dominate

The Federal Open Market Committee meeting looks unlikely to bring any major policy shift, but economic forecasts could help drive dollar sentiment.

The Federal Open Market Committee (FOMC) are coming back to the table once again in the coming days, with the latest virtual meeting set to conclude on Wednesday 16 September.

Powell shifts the goal posts

The most recent development at the Federal Reserve (Fed) came from chair Jerome Powell’s Jackson Hole symposium appearance, with the governor laying out a new average inflation targeting policy that came about as a result of the a major strategic review.

The decision to shift the goal posts reflects a feeling that an extended period of below-target inflation could allow for a similar period of above-target inflation. From a market perspective, this removes one of the hurdles to an extended period of easing, with the current expansive policy set seemingly allowed to run for as long as necessary

This upcoming meeting looks likely to focus in on the fresh targeting method rather than any immediate shift in policy, with traders looking for greater clarification on this new strategy.

What to look out for

While the FOMC looks unlikely to change their monetary policy stance, there is still plenty for traders to get their teeth stuck into.

One key release will be the staff economic projections, with inflation, and growth forecasts set to dominate. Considering the fact that the new strategy should reduce the need to keep inflation low, growth will be key here as markets look for a more optimistic outlook.

Will the dollar decline continue?

The dollar index managed to find some support over the first week of September, with the price rising through 93.50 resistance last Wednesday.

That breakout didn’t last very long, with the dollar easing back as we head towards Wednesday’s meeting. The question here is whether that break through 93.50 marks the first tentative signal of a bullish reversal for the dollar.

From a short-term perspective, the four-hour chart highlights the consolidation we have seen over the course of the past month. With price heading lower, a break below the 92.67 would bring about a bearish short-term signal.

However, we ultimately need to see a break through either 93.64 (bullish reversal), or 91.74 (bearish conituation) to signal where we go from here.


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