FOMC April Preview: Fed language to determine market reaction

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It is widely expected that the FOMC April’s meeting will see no rate hike, but investors will closely scrutinize the language of the FOMC statement for June

It’s almost quite clear that the US Federal Reserve will be hesitant to hike rates this month. With the April FOMC meeting due later this evening, the event is expected to see no major changes putting the focus on the outcome of the FOMC statement. A continued dovish stance could put the dollar under pressure while a less dovish tone could see some strong gains in the US dollar which has fallen to a 42-week low before posting a modest recovery for the past two weeks. Further adding to the confusion is the fact that just a few hours later, the Bank of Japan would be meeting and later that evening, the US advance GDP estimates will be released, all of which could bring a lot of volatility in the markets.

Fed_FOMC

April 2016 CME Fed Fund Futures Watch (100% probability that rates will stay unchanged today)

Here are some of the expectations on today’s FOMC statement:

TDExpects that the Fed will remain on the sidelines at the April FOMC meeting while the statement will once again balance improving US fundamentals with international developments. The outcome will likely disappoint those expecting the Fed to acknowledge the improvement in financial conditions and imply a dovish (less hawkish) market interpretation.”

BNP Paribas saysFinancial conditions have eased, but risks still loom large. Growth has slowed for 2 quarters. We expect the April FOMC statement to repeat that: “global economic and financial developments continue to pose risks.” The statement will likely feature few changes and avoid rocking expectations in either direction.

BAML saysbelieve the meeting on April 29th will prove to be a “place-holder.” However, we do expect small tweaks to the language, specifically noting that global economic and financial risks have abated somewhat. Overall, we still think we are on track to see two rate hikes this year”. It further adds “if the dollar weakens as we have seen so far this year, it would add 0.3pp to core PCE inflation. An improving trajectory for core PCE inflation would give us more confidence that the Fed will hike rates this year and next.”

RBC saysFOMC meeting will likely be light on any new or material information, particularly since there is no post-FOMC press conference at this meeting. Instead, we think the most significant changes will come from simply marketing to market the currency economic assessment.” RBC says that the Fed must recognize soft consumer spending and slow Q1 GDP so will take “a reserved tone in its economic assessment.”

Goldman: “The FOMC is widely expected to remain on hold next week, but the post-meeting statement will be closely watched for guidance on the policy outlook. We expect the statement to say that the risks to growth and inflation are nearly balanced or to otherwise indicate that downside risks have receded somewhat since early this year.

Overall, the market expectations for the FOMC meeting this week is for the Fed to hold rates steady. The forward guidance, regarding the FOMC’s statement, will gain focus. While June remains a low probability meeting for the Fed to hike rates, a subtle shift in the Fed’s language will no doubt see the markets quickly scale back their bets on the US dollar.

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