Currencies, equities and Treasuries are trading quietly ahead of the Federal Reserve’s monetary policy announcement. While this may suggest that a big breakout could occur post FOMC, we believe it will be a far less eventful central bank meeting particularly compared to last month when they decided not to taper, causing the dollar to fall aggressively.

No one expects the central bank to alter interest rates or reduce the size of their Quantitative Easing program and the majority of market participants are looking for a more pessimistic description of the economy. Both the labor and housing markets have deteriorated since the September meeting and as we have seen in today’s ADP report, job growth remains weak. According to the private payroll provider, American companies added only 130k jobs to their payrolls in the month of October, down from 145k the previous month. Not only was this worse than economists anticipated but job growth the month prior was also revised lower. There’s no question that the government shutdown affected decisions to hire but there’s also no guarantee that hiring will rebound with Washington back in business. For policymakers, this uncertainty coupled with lower inflationary pressures should be enough to delay tapering. Consumer prices grew 0.2% in the month of September but on annualized basis slowed to 1.2% from 1.5%.

The problem is that investors are already bracing from a downgraded description of the economy. So the only way that the Fed could catch the market by surprise is if they brush off the recent data deterioration and appear less dovish. The chance is slim but not out of the question because the recovery is widely expected to regain momentum in November after slowing in October. Yet the Federal Reserve is not one jump the gun and assume that a recovery in November will last into December. Instead they will most likely repeat that they want to see “growing underlying strength in the broader economy” before taking action. There is no benefit to appearing overly optimistic without reliable data on hand because the risk is higher rates that could endanger the recovery.

So while the tight consolidation in USD/JPY points to a potential breakout, the FOMC rate decision may not do the trick. We expect the dollar to react to the Fed’s outlook but its move could be limited to 1% against all pairs. For USD/JPY this means that the 96-99.50 range should remain intact and for the EUR/USD, this means that any moves should contained between 1.36 and 1.39.

One Comment

  1. Paul Volcker says:

    Can’t the NSA just tell us now what the FOMC has decided?
    Why wait?

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