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Dollar Volatility and Trend Risks to FOMC Decision Very Different

John Kicklighter

DailyFX.com -

Talking Points:

  • Dollar Volatility and Trend Risks to FOMC Decision Very Different

  • Euro Stimulus Put Immediately to the Test as Greece Troubles Simmer

  • New Zealand Faces GDP and the Market’s Monetary Policy Forecasts

Dollar Volatility and Trend Risks to FOMC Decision Very Different

It is finally upon us. The Federal Open Market Committee’s (FOMC) March policy meeting is underway, and the group’s conclusions will be announced at 18:00 GMT (2:00 PM local time). Both the US Dollar and the S&P 500 – as a weathervane for broad investor sentiment – are at risk of losing traction on their respective bull trends. While this meeting is highly unlikely to bring any material change to policy in rates or unorthodox policy, an excessively vigilant market has its Fedspeak dictionary out with the intention to gauge the timing of the first rate hike. There will be plenty of opportunity to speculate on timing in this event. In addition the normal statement, we will receive updated forecasts on employment, inflation and interest rates as well as Chairwoman Janet Yellen’s sentiment in her press conference. For ‘sheer impact value, however, the immediate concern revolves around the inclusion of a single word: “patient”. This particular term has been construed to mean the first hike would be more than three months out. The Fed knows the market’s interpretation, and the market knows the Fed knows.

Speculation for a ‘mid-2015’ rate hike has gained serious traction over the past six months – and particularly the previous three. The Dollar’s incredible rally is testament to the weight a hawkish forecast has garnered. Given how far the market has moved, it is reasonable to presume there is an exceptional amount of premium afforded to confirmation that the next step in the telegraphed tightening regime will be realized. As such, if ‘patient’ remains; the Greenback would likely take a tumble. In fact, merely meeting expectations may see the currency ease back on the speculative swell. That said, a slip in the short-term does not alter the longer-term trend as the contrast between the Fed and its counterparts remains exceptional. For ‘risk trends’, the risk is the opposite. The implications of removing support from the system can send the masses deleveraging over-extended speculative positions. Little of this impending risk is currently reflected in the S&P 500. Short-term volatility may be the most dramatic with a push back of the first hike, but investors know it is coming.

Euro Stimulus Put Immediately to the Test as Greece Troubles Simmer

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