What to expect from today’s FOMC meeting

The dollar continued to sell-off against its major peers on Wednesday morning as investors braced for a dovish tone of communications from the Federal Reserve this evening.

As mentioned yesterday, this evening’s FOMC announcement is not expected to bring any significant policy changes, for a number of reasons. Financial markets have bounced back from their virus-induced sell-off. The S&P 500 index is currently trading more-or-less unchanged for the year, having rallied by over 40% since its lows in March.

Macroeconomic data has also shown broad improvements, in part due to the large state and central bank response and the unwinding of lockdown measures. The US government is also still yet to agree on an extension to its additional unemployment insurance benefit scheme, with talks said to be ongoing between the Republicans and Democrats. For this reason, we think that the Fed is likely to sit tight and try to keep a low profile while it awaits news out of Congress.

That being said, Chair Jerome Powell’s comments could still shift the markets. We expect policymakers to continue stressing that interest rates will remain at current record low levels for the foreseeable future. Powell is also likely to strike a cautious tone, noting the significant downside risks that remain, notably the rising US virus numbers and the possibility of further lockdown measures. In anticipation, investors have continued to go short the dollar, sending the currency above the 1.175 and 1.295 levels versus the euro and sterling respectively.

Investors await tomorrow’s US, Euro Area GDP data

This week has been a relatively quiet one so far in terms of macroeconomic news, with the major currencies driven largely by shifts in investor sentiment.

Activity will begin to pick up in the next couple of days, with market participants likely to have one eye on tomorrow’s US second quarter GDP data. This will be the first real hard indicator of just how significant the downturn was during the height of the lockdowns. Investors are bracing for an eye watering 34% annualised contraction. Second quarter GDP data will also be released out of Germany tomorrow, followed by the Euro Area number on Friday.

While these data points do of course run on a little bit of a lag, we still expect some volatility around their release. Should the data suggest that the prolonged lockdowns led to a greater-than-expected slowdown in the US relative to Europe, then we could be in for another bout of strength in the common currency.