Several hours before the Fed's decision, the publication of macroeconomic projections and a press conference, the EUR/USD exchange rate is below 1.1900, shedding some of yesterday's increases. The currency options market, meanwhile, shows slightly higher volatility, but without above-average expectations.
The Fed is expected to keep interest rates at the current low level for a longer period of time, which seems to have already been taken into account by the interest rate market. According to investors, interest rates in the U.S. may be close to zero by 2023. There is, however, some risk that FOMC representatives' forecasts may look more hawkish than expected, which may cause the dollar to rise.
The latest U.S. data exceeded expectations. The August CPI and import prices indicate that inflation could rise. The robust August industrial production data, together with further employment growth, may indicate an improvement in US GDP. If inflation and GDP forecasts exceed investors' expectations, there may be a risk of a return to the dollar, which may cause the EUR/USD exchange rate to fall.
According to investors in the currency options market, sustained exchange rate movement above 1.2000 is becoming less and less likely, while option positions have increased, assuming a shift back to the range of 1.1600-1.1700, DTCC (The Depository Trust & Clearing Corporation) data shows.
In a comment dated September 14th we presented the opinion of Morgan Stanley and Goldman Sachs. Today we will add Barclays' expectations to this.
Barclays does not expect any significant changes in the macroeconomic projections at the September Fed meeting. FOMC members may want to wait with their decisions in order to have more clarity over time. Only then can they decide how long the current interest rates may be close to zero, Barclays says. However, the Fed may communicate to the market a change in its position on asset purchases. These can be carried out in order to support economic growth by primarily lowering yields at the long end of the curve, which the Fed raised by averaging its inflation target.
As part of this change, Barclays believes that the Fed may decide to shift purchases slightly towards longer-term securities. At the press conference, Chairman Powell is expected to emphasize that there are still risks associated with the COVID-19, which could translate into uncertainty over monetary and fiscal policy.
The decision on interest rates together with the macroeconomic projections will be published today at 20:00. The press conference will start at 20:30.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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