The Dollar/Yen is inching slightly lower early Wednesday in a lackluster trade as investors await the release of key monetary decisions by the U.S. Federal Reserve. Many of the major players are on the sidelines ahead of the Fed which is helping to restrain the price action. After the Fed announcements, however, we expect to see heightened volatility if the Fed comes across as extremely hawkish or even less-hawkish than expected.
The Federal Reserve on Wednesday is expected to approve plans to scale back its $120 billion monthly bond-buying program put in place to help the economy during the coronavirus pandemic, while investors will also be focused on commentary about interest rates and how sustained the recent surge in inflation is. Inflation will also be a hot topic.
At 14:52 GMT, the USD/JPY is trading 113.868, down 0.085 or -0.07%.
Traders are keeping their powder dry because of uncertainty over the Fed announcements. On one hand, you have the Federal Funds futures market pricing in as many as three interest rate hikes in 2022. Goldman Sachs sees two rate hikes and others see the Fed as announcing the start of tapering but not giving traders any specific timing around a rate hike.
CME Group’s FedWatch Implies Three Rate Hikes
Investors continue to increase their expectations that high and persistent inflation would force the Fed to raise interest rates sooner and faster than policymakers have projected. Contracts in Federal Funds futures now imply three quarter-point rate increases next year, versus two as of late last week, according to data from the CME Group’s FedWatch.
Goldman Predicts Hawkish Tone
Goldman Sachs has brought forward its forecast by a year to July 2022 for the first post-pandemic U.S. interest rate hike, as the investment bank expects inflation to remain elevated.
The investment bank also expects a second interest rate hike in November 2022 and two rate increases each year after that.
Daily Forecast
I think the Fed will announce tapering, but will take a wait and see approach toward the timing of its first rate hike and subsequent hikes. In doing so, policymakers will attempt to avoid shocking the market by suddenly changing their tune on inflation from “transitory” to a major problem that needs to be fixed by aggressively raising interest rates multiple time within a year.
Furthermore, I don’t think the Fed wants to stifle a zig-zagging economic recovery or risk slowing down the labor market trend.
The USD/JPY could spike higher with a move to 115.500 a possibility if the Fed acknowledges the need for three rate hikes in 2022. The Dollar/Yen could sell-off sharply through 112.760 if the Fed comes across as less-hawkish or even dovish.