USD: Doves to prevail as Chair Yellen faces up to a dichotomous FOMC

In view of Viraj Patel, Research Analyst at ING, the Sep FOMC meeting will be the main event of the week (Wed), with investors looking to see if there is any change in policy bias in light of the recent negative developments in the US economy.

Key Quotes

“We think this may be one of the more difficult meetings and press conferences for Chair Yellen to navigate, not least because of the growing dichotomy within the FOMC over the appropriate near-term policy approach. Our base case is for the doves to prevail, with a lower conviction over the pace and extent of future policy tightening visible in the Fed's dot plot. While the median 2017 dot is still set to tentatively pencil in a Dec rate hike, we expect to see more members calling for a pause for the remainder of the year; anything more than five would suggest that hopes of a Dec hike stand on a fragile footing.”

“More telling of a dovish shift, would be if the 2018 dot also moves lower; here we require five or more members to downgrade their views over future policy hikes, a scenario that cannot be ruled out given the softer US inflation dynamics. What is very likely is that the 2019 and longer-run dots move lower – with Fed officials acknowledging that a 2% handle for the terminal Fed funds rate is more realistic.”

“While we do not expect US yields or the USD to move much on what would be a well-telegraphed balance sheet announcement this week, there is a slight risk of the Fed delaying the start of this process. This would suggest a more pessimistic Fed view of the US economy and would be outright USD negative.”

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