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While equities are upbeat, there is a sense of caution in treasuries and the USD ahead of the Fed meeting. The market is really divided on how the Fed statement will play out, given the global growth concerns and inflation risks. The median consensus call for a Fed funds rate hike is Q2 of 2015 (52%), with 29% for Q3 and 8% for Q1.
The rest feel Q4 or 2016 are the most likely options. This meeting will help shape expectations but I suspect December seems a more likely time for firm action. The December meeting comes with updated projections – perhaps the Fed will look to use this as a good opportunity to make any changes.
USD/JPY momentum positive
With markets risk-on, the USD lost ground against some of its peers, except the yen. USD/JPY clawed its way back above ¥108.00 and is just testing last week’s highs. I feel this will be the pair to watch this week, given the Fed and BoJ are both meeting.
Over the past couple of days we’ve actually had some positive releases out of Japan as retail sales and industrial production both came in ahead of expectations. This still hasn’t resulted in any strength for the yen, which I feel is due to traders not wanting to be caught out ahead of the BoJ meeting. Momentum is also to the upside at the moment – a break above ¥108.35 could lead to further near-term gains.