The FOMC preview from Royal Bank of Scotland (RBS):
Summary: We expect the FOMC to remove its language that suggests it can be patient
in beginning to normalize policy. But beyond that, Chair Yellen is unlikely to give any
hints as to the exact timing of a move, as full data dependence implies that the move will
depend wholly on how the data unfold. But most of the commentary will likely, in our view,
will lean on the positive side and be focused on preparing markets for a normalization in
policy that is likely to begin later this year at some point but will be gradual in nature.
While that likely limits the scope for Chair Yellen and the FOMC to take an outright dovish
stance, that “unclear” stance may be enough to leave participants disappointed about the
lack of a true hawkish signal. Heading into the decision we retain core USD longs against
both EUR and GBP. Short GBP/USD.A hawkish surprise, relative to the Fed Funds futures market pricing of the first rate hike
in September, would be language that pulls the timing of the first hike more credibly into
June. Chair Yellen may stress that April and June are on the table and sound more
upbeat on employment and inflation, given the pickup in market-based measures of
inflation expectations. On hawkish surprises, we like long USD/JPY. While not our base
case, a dovish surprise could come via a lack of change in key language, specifically
retaining “patient” forward guidance. Dovish risks include a downward revision to the “dot
point” projections and Chair Yellen’s press conference dampening market expectations
by referencing a still-soft wage pressures. On a dovish surprise, EUR/USD shorts may
be squeezed, though we prefer to fade any rallies in EUR/USD.
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