To Stimulate or Not To Stimulate, That is a Question for the FOMC ?

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Today’s FOMC announcement, at 2:15pm EST, remains highly contentious with regards to market participants’ expectations on the potential for changes to policy.  As we approached today’s set of PMI releases, consensus had appeared to focus on the Fed’s September meeting for more aggressive action, with only the possibility of an extension to the late-2014 conditional rate pledge at today’s meeting.  Arguments against easing at today’s meeting have centered on the fact that policymakers lack an adequate amount of data to ascertain the overall health of the economy at this time.  However, FX movements suggest that market participants are selling the USD vs the non G4 central bank currencies, indicating that there are expectations for easing from the Fed, and not just the ECB and BoE tomorrow, which would have driven only weakness in EUR and GBP vs the USD.

With the Fed meeting today, the ECB and BoE tomorrow, and the BoJ next week, market participants are gearing for policy action or at the very least accommodative rhetoric within the upcoming press conferences & policy statements.  The minimal room for conventional easing from the G4 central banks leaves only further use of non-standard, unconventional measures that expand their balance sheets and weaken their respective currencies.

The issue is that markets had come to mix in expectations for Fed stimulus, so do you reaffirm those expectations or ignore them? 

Traders suspect that the Fed will offer a small sampling for them in the near term, even though a case for QE3 to be applied at this juncture is solid were it not for Fed mindset that typically waits longer than could be supported.

Odd makers have given a 65% chance to September for major stimulus since that’s when the Fed releases updated projections and it can wait to see what the ECB does if anything, yet it puts in place markets supports in advance of the fiscal cliff that can be fine-tuned by altering the monthly purchase targets as the Fed sees fit. There is 40% odd to major stimulus today, but wouldn’t make it a base case just yet.  We also have to view this from the election standpoint and the pressure being exerted by the Obama Administration and how this any stimulus will be viewed in that context.

At this writing the US dollar index is at 82.67, the euro is trading at 1.2314 and gold is 1608.35. From these numbers it seems that traders have decided that we will see a bit of giving from the Fed Chairman later today

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About:FX Empire Analyst - Barry Norman

Barry produces a private Daily Market Review newsletter that is distributed around the globe to over 25,000 subscribers and recently published a book on Options Trading that is available from amazon.com

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