Yields and USD remain underpinned ahead of the FOMC meeting. Economists at MUFG Bank believe Powell has a really tough job to convince the markets of the sustainability of the Fed’s ultra dovish stance.
Ahead of the all-important Federal Reserve decision, EUR/USD is hovering around 1.19, GBP/USD is trading near 1.39 and USD/JPY is at 109, all experiencing narrowing ranges.
Key quotes
“The DOTs plot will be one key area of focus and at the margin we see the median DOT for the timing of the first rate increase remaining in 2024 – four FOMC members would need to bring forward their view to 2023 in order to see the median shift to 2023. That’s certainly feasible and wouldn’t be a huge surprise given the scale of increase in macro estimates we are likely to see following the $1.9trn fiscal stimulus that’s about to start hitting the economy.
“We do not expect notable changes to the core PCE inflation estimates. The 2021 estimate in December was 1.8%; 2022 was 1.9%. One or two-tenths of an increase is plausible but under the Fed’s new target of averaging 2.0% inflation over time, this upgraded inflation forecast is well within a permitted range.
“While we may well get to a point this year when the Fed deems it necessary to signal a slowing of the current $20 B per month pace of QE, tonight is certainly not the time for that.”
“We don’t expect the Fed to announce anything formal on the extension of the Supplementary Leverage Ratio. The exclusion of UST holdings from that ratio expires at the end of the month. An extension of this exclusion of UST holdings from the SLR would alleviate selling pressure and could have a short-term impact on lowering UST bond yields. Powell will be asked about this for sure in the press conference and any subtle hint of an extension would help alleviate upward pressure on yields.”
“We maintain that Powell has a difficult job to convince the markets on the maintenance of the dovish stance. Even with low inflation forecasts; no shift in the DOT plot and strong dovish words, we see limited scope for yields to decline much over the short-term and see risks for the US dollar still skewed to the upside for now.”
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