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Language changes ahead from FOMC? - BAML

FXStreet (Guatemala) - Analysts at Bank of America Merrill Lynch note that markets are anxiously awaiting the September FOMC meeting.

Key Quotes

"We expect modest language changes, upward drift of the dots, and a balanced discussion by Fed Chair Janet Yellen - all of which runs the risk of a hawkish market reaction."

"That said, we expect Yellen to still emphasize a patient approach to policy, consistent with a mid-2015 start to a gradual hiking cycle. We recently updated our own Fed call for liftoff to begin in June 2015."

"What is it with Septembers at the Fed? Back in 2011, the FOMC announced Operation Twist. In 2012, they extended the calendar-based forward guidance out to mid-2015 and announced QE3."

"Last year the widely anticipated start to tapering was postponed in the face of weaker data, fiscal uncertainty, and tightening financial conditions. That led to the second-largest drops in both 2-year and 10-year yields at any FOMC meeting over the past several years”.

"The largest declines in each occurred at the August 2011 meeting, when the FOMC first introduced calendar-based guidance. More recently, the switch away from thresholds to more qualitative guidance in March of this year coincided with the largest increase in two-year yields in the sample shown, and a relatively big increase in 10-year yields as well. With markets anticipating another meaningful change in language, we could once again see a selloff in rates and a stronger US dollar in foreign exchange markets."

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