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Later today, the FOMC policy decisions will be published. However, after last month’s bold action, one might expect the Fed to maintain its assessment on the economy and its policy intentions. If so, the Fed communique shouldn't be a big issue for currency trading. At the conclusion of today's FOMC meeting, which isn't followed by a press conference and at which no new forecasts will be available, shouldn't bring surprises. It comes too soon after the previous meeting, where far-reaching measures were taken. Therefore, it is too early to draw conclusions about the effect of these measures. On top of it, less than 14 days before the presidential elections, the FOMC doesn't want to grab the attention away from the elections, especially not as it recent measures were already object of heavy political criticism. Recently, economic data improved a little bit, on the housing and to a lesser extent on the labor market. Some of the QE initiatives were tied directly to employment and we might hear some comments on the drop in unemployment to 7.8%. The EUR/USD is expected to find this statement neutral and we do not expect much Fx action after this release. Although we know Mr. Bernanke can shake up the markets. Although the dollar index is expected to stay fairly flat.
However, the changes are too small to have already an impact on monetary policy. Nevertheless markets will look whether there is some tweaking on the economic assessment. During the meeting, talk about the communication strategy will dominate, more in particular whether the Fed should use numerical objectives to frame its expectation about future rate changes instead of the calendar guidance. It would be a surprise though, for the above mentioned reason, if the FOMC would already conclude this discussion and still more if it would reveal its conclusions. The December meeting with press conference and just ahead of the end of the operation twist is a more appropriate opportunity to unveil new initiatives on communication.
Prior to the US Fed, markets will hear from European Central Bank. Mr. Draghi’s performance before the German parliament (+ teleconference) today will be closely followed in markets. He faces head on a critical audience that doesn't like monetary novelties like the OMT and that has clearly heard their Bundesbank president opposing this measure. It is brave that Draghi wants to defend his policy in Berlin. Will he succeed in convincing the German parliamentarians (and the population) that with the OMT program, the ECB stays within its mandate? Will he convince his audience that the program is both very much needed to save the euro area and unlikely to cause inflation? This presentation should remain EUR neutral, leading into the Fed statement.
Mr. Draghi has his work cut out for himself today, as EU Ministers cannot even stop bickering long enough to take some positive actions, now he needs to convince his opposition.
I think Mr. Bernanke will have an easier day.