The USD was trading broadly lower against its G10 counterpart on Monday morning as investors anticipated a busy week for central bankers. The Federal Reserve is set to release its monetary decision on Wednesday. After lifting rates in March, the FOMC is broadly expected to increase borrowing costs by another 25bps, which would bring the upper Federal Funds limit to 1.25%. While the decision is entirely priced in, investors are already looking towards the next move from the Fed.
Indeed, back in December last year, FOMC members hinted at three hikes in 2017. Should the Fed tighten this week, this would make the second hike this year, meaning the central bank needs to hike one last time to match its forecast. However, given the recent weakness in inflation, we do not expect the Fed to signal strongly a September move as it would put it in a difficult situation should the situation worsen. The FOMC could not appear too dovish as it would dampen investors’ mood; therefore we expect the dots to show a third hike before year-end. However, we anticipate that both the statement and the following press conference will emphasise the need for caution.
Safe haven assets have been in solid demand this morning, suggesting that investors were quite reluctant to load on risk. USD/JPY reversed Friday’s gains and returned to the 110 threshold, while the yellow metal rose 0.20% to $1,270
By Arnaud Masset