FOMC Meeting Preview: FOMC to downplay Q1 data weakness

The April FOMC meeting concludes on Wednesday 29 April and the FOMC statement is released at 20:00 CET. There will be no press conference or updated projections.

The tone of the speeches since the March meeting has been mixed, but the most relevant speakers, Fed Chair Janet Yellen, New York Fed President William Dudley and Vice- Chairman Stanley Fischer, have in general signalled that they expect current weakness in US data to be partly temporary. However, in particular, Dudley has been clear that the recent run of data has increased the uncertainty around the outlook for growth this year. We expect the statement to acknowledge the weakness in recent data but to emphasise that the Committee still views the soft patch in US growth as caused at least in part by temporary factors.

While activity data has been weak, inflation data has surprised on the upside with core CPI up 0.2% m/m in both February and March and PCE core inflation (the preferred measure by the FOMC) set to post a similar trend. The statement is thus likely to note that inflation has stabilised lately.

We expect the statement to leave the paragraph on the economic outlook unchanged and repeat that The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term. The FOMC would like to break completely free of calendar-based rate guidance and we do not expect the paragraph that an April hike is unlikely to be replaced with guidance on what to expect for the coming meeting on 16-17 June.

Although the changes to the language are not major, we could see an upward move in rates following the statement. During March, market participants have adjusted their expectations of a first fed funds rate hike from October to December/January as data has continued to disappoint. If the FOMC downplays the weakness in data, as we expect, and acknowledges the latest stabilisation in core inflation, we believe the statement will push US rates higher and data released over the coming week should also work in that direction (see Weekly Focus: Riksbanken to add fuel to the currency war).

We are currently awaiting the next and likely final leg of USD strength and the FOMC this week could sow the seeds for this. Currently, investors appear somewhat reluctant to buy into more dollar upside following recent weak US data and stretched long USD positioning. The FOMC will likely in itself not be enough to trigger more than a temporary blip in EUR/USD though. As we have argued previously, we probably need to see surprise indices shift clearly in favour of the US vs. the euro area for EUR/USD to initiate a trip to below parity as we call for in six months. The FX market will clearly stay alert to any Fed comments on the USD but if we are right that the FOMC will signal that it is not taking part in a currency war, the scene is set for a healthy April payrolls report to become the catalyst for a EUR/USD sell-off. We are short EUR/USD in our Danske FX Trading Portfolio, see Danske Bank FX Trading Portfolio: Sell EUR/USD.