Data dump, Fed meeting adds to noise

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The US markets are in for a busy day today with consumer inflation, housing starts and building permits data coming out ahead of the Federal Reserve’s monetary policy statement and press conference. Combined, the data is likely to add significant noise to the US Dollar.

The Federal Reserve is expected to announce its monetary policy statement today at 1800 GMT and will include the policy statement, economic projections and the interest rate decision. Thirty minutes later, the FOMC press conference will be hosted by Fed Chair Janet Yellen.

At the December meeting when the Fed hiked rates, the SEP pointed to four rate increases in 2016, but currently, the markets are pricing in a 50% change of a rate hike in June and a 75% chance of a rate hike in December, according to the Fed funds futures. This brings down the markets expecting to see only two rate hikes this year, against the Fed’s projected four rate hikes. The average Fed funds rate according to the futures market is projected to be at 0.60% by December and rise to 0.90% by the end of 2017 below the Fed’s projection of 1.375% by the end of 2016 and 2.375% by 2017.

[Tweet “Federal Reserve is expected to hold rates steady at 0.25% – 0.50%”]

At today’s meeting, the Federal Reserve is expected to hold rates steady at 0.25% – 0.50%. Economic data since December has been largely moderate. The US unemployment rate has remained steady at 4.90% since January, improving from 5.0% in December but the average hourly earnings have remained volatile. After wages increased 0.50% in January, wages fell -0.10% in February.

GDP was also modestly higher, rising at an annualized pace of 1.0% in the last quarter of 2015, higher the initial estimates of 0.70%. Inflation, however, continues to evade the Fed’s 20% mandated target although it has shown signs of edging closer. A the last reading consumer prices in the US was up 1.40% on a year on year basis in January of 2016 up from 0.70% increase in the previous month. Inflation rate managed to accelerate for the fourth straight month and the current print of 1.40% marks the highest since October of 2014. The next reading is due today ahead of the Fed’s policy announcement.

[Tweet “The hawkish signal from the Fed could potentially offset the downside risks of leaving rates unchanged”]

Overall, the Fed is likely to stand pat on policy at today’s meeting but the tone of the statement will likely reflect the improving fundamentals. Fed officials had previously projected that US unemployment would fall to 4.70% by 2016 while economic growth was projected to be at 2.40%. The hawkish signal from the Fed could potentially offset the downside risks of leaving rates unchanged.

Ahead of the big event, today, the markets have remained cautious. Gold prices which have enjoyed a stellar rally in the first two months of the year were seen trading lower following the failure to break above the 1275 – 1280 handle and with the $1250 support being cleared out, Gold prices could continue their descent towards the $1200 mark. Meanwhile, EURUSD remains range bound after the Euro is showing signs of a pause in its rally from the last week’s ECB meeting.

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