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FOMC policy statement wording expected to remain unchanged - BTMU

FXStreet (Łódź) - Derek Halpenny, European Head of Currency Strategy at the Bank of Tokyo Mitsubishi UFJ projects that the Fed monetary policy statement, due out later today, will state that a 'considerable time' still has to pass before rates are hiked.

Key Quotes

"Given how calm the financial markets remain, it is clear that the key part of this evening’s FOMC announcement is not the confirmation that QE3 has been completed but that we remain some 'considerable time' away from the first rate increase. That phrase along with the 'significant' under-utilisation of labour resources are both set to remain in the statement – a view that has certainly helped restore calm to the financial markets."

"The S&P 500 closed 6.6% higher yesterday from the low on 16th October on the belief that any changes to the statement this evening are likely to signal an extension of that 'considerable time' period. The dollar has softened somewhat and over the coming days we believe the risks are that we see a further sell-off of the dollar given much of its recent strength has been fuelled by the favourable relative monetary policy story."

"But we find it hard to share the market’s view on the timing of the first rate increase being further into the future. The June 2015 federal funds future implies close to zero probability of a rate increase by mid-year."

"It is only by November that you could say the federal funds futures strip is fully priced for a rate increase. Certainly, yesterday’s consumer confidence data pointed to the US consumer being in good shape as we head toward the key shopping period of the year."

"That makes sense given the drop in gasoline prices could add USD 70-80bn on an annualised basis to consumers’ pockets while that sharp equity market rally that the consumer confidence survey caught at least part of will have eased fears over household wealth. Add to that the fact that initial claims data are showing close to the slowest pace of firing on record and you have a recipe for a solid holiday spending period."

"Still, those factors will perhaps shape market expectations at a later date – for today, the FOMC will be focused on delivering the end of QE3 without any financial market fuss and to ensure that we should all expect a dovish statement. The 20bp drop in inflation expectations (the Fed’s 5yr-5yr forward breakeven rate) may well be highlighted to reinforce the scope for being patient with the federal funds rate. EUR/USD can probably continue to edge higher from here but a dovish statement is well in market prices, so we don’t expect any major dollar move."

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