Preview for June FOMC Outlook and Armour to USDollar

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Talking Points:

– The DXY Index is gaining for a third straight day ahead of an expected 25-bps rate hike by the Federal Reserve later this afternoon.

– However, with rates markets pricing in a 100% probability of a hike, forward guidance – the path for hikes in the remainder of 2018 – will be the pivotal aspect of today’s rate decision.

– See the full DailyFX Webinar Calendar for upcoming strategy sessions pertaining to the June FOMC and ECB meetings.

Looking for longer-term forecasts on the US Dollar? Check out the DailyFX Trading Guides.

As we await the conclusion of the June FOMC meeting later today, Fed funds futures are pricing in a 100% chance of a 25-bps rate hike – just as they have since the end of April. The US Dollar (via the DXY Index) is pressing forward for a third straight day ahead of what is essentiallly a guaranteed policy move.

As has been the case when front month odds are at 100%, the direction of the US Dollar is not contingent on the Fed raising rates but rather what expectations are set for the path of rate hikes down the line. Currently, rates markets are pricing in additional 25-bps hikes in September and December, with odds pegged at 77% and 51%, respectively.

Table 1: Fed Rate Hike Expections (June 13, 2018)

Preview for June FOMC Meeting and Outlook for US Dollar

With regards to the latter pricing, December odds have more than doubled from their low at the end of April, over which time the DXY Index has rallied by more than 4%. It would thus stand to reason that the DXY Index will be less sensitive to the rate hike itself today and more sensitive to the perspection of the pace of future tightening.

Accordingly, the biggest source of volatility for the US Dollar will come from the updated Summary of Economic projections. With the unemployment rate below 4% and headline US infllation at its highest rate in more than six years, there is a legitimate case to be made by Fed officials that the odds of two more rate hikes this year is more than a coin flip – and at 51% implied probablity, odds for four cumulative hikes this year is basically a coin flip.

To this end, an upgraded Summary of Economic Projections coupled with a tone tilted more hawkish today by Fed Chair Jerome Powell should prove supportive for the US Dollar.

See the above video for more on the tone needed from the Federal Reserve to lift the US Dollar, what to expect from the European Central Bank tomorrow, as well as technical considerations in the DXY Index, EUR/USD, GBP/USD, USD/JPY, Gold, and the S&P 500.

Read more: US Dollar Shrugs Off Trump-Kim Summit, Eyes FOMC and ECB

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— Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX