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The Federal Reserve convenes for its July 2017 meeting and we focused on one word. Here are 5 additional views from banks:

Here is their view, courtesy of eFXnews:

USD: No Change From The FOMC This Week But Balance Of Risks Slightly Bearish – Danske

Danske Bank FX Strategy Research expects the Fed to maintain the Fed funds target range at 1.00-1.25% at this week’s meeting,  in line with consensus and market pricing.

“As it is one of the small meetings, all eyes are on the statement, as there are no updated projections and no press conference. Given the Fed seems to act only at the big meetings, we think the Fed will wait until September to make an announcement on ‘quantitative tightening’, despite many FOMC members thinking they should get going ‘relatively soon’.

We do not think there will be major changes to the FOMC statement, although it is likely the probability is skewed towards a slightly more dovish tone  given inflation has now been weaker than expected for four consecutive months,” Danske argues.

Danske is currently reviewing its EUR/USD forecasts.

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USD: Expect 2 Notable Changes From July FOMC Statement; Impact On USD – Credit Agricole

Credit Agricole CIB FX Strategy Research notes that  the FOMC meeting on Wednesday will not be accompanied by the new projections and a press conference but there could be  some notable changes to the statement.

First, the statement may further emphasise that inflation developments are being monitored closely given the recent disappointing readings and hints of doubt in the Chair’s testimony last week.  Second,  the statement should also start to point to balance sheet reduction plans being announced in September, possibly repeating the “relatively soon” reference,” CACIB adds.

“As such the two innovations should be somewhat  mutually offsetting in terms of their USD impact,” CACAIB argues.

USD: July FOMC A Non-Event For USD; Follow The Momentum For Now – BofAML

Bank of America Merrill Lynch FX Strategy Research  expects  the FOMC to send a strong signal at its July meeting that balance sheet normalization will be announced at the September meeting.

“The FOMC is likely to tweak the statement to strengthen the commitment to balance sheet normalization but express greater concern about low inflation. Specifically, we expect the FOMC to note the Committee expects to begin implementing a balance sheet normalization  program  soon.  This would send a message that the FOMC is on track to announce  the start of  normalization at the September meeting.  We also expect the FOMC to emphasize the recent  subdued  inflation.  

The outcome of these potential language changes would signal the FOMC  is  more cautious regarding  the path of  future  rate hikes, but still committed to shrinking the balance sheet, in our view,” BofAML argues.  

FX: a non-event for USD.

We do not see much of a USD impact from the meeting.  Market implications from FOMC meetings without a press conference are usually limited and shortlived. We expect new policy initiatives this fall:  more details on unwinding the balance sheet and one more hike. The consensus is also that the July meeting will be a non-event for the USD, with recent flows mostly driven by other events,  ex  ECB, data and risk sentiment.

In the meantime,  we would follow the momentum against the USD, until we get some signs to become contrarian and go long,” BofAML adds.

USD: FOMC Won’t Likely Challenge Bearish Outlook This Week – BTMU

BTMU FX Strategy Research notes that the recent weakness of the USD  has been driven as well by dampened expectations for further Fed policy tightening, and  doesn’t expect the Fed to challenge this bearish outlook at this week’s policy meeting.

“The latest FOMC statement is expected to display  more caution over the pace of further policy tightening  by signalling more concern over the softer inflation recorded in recent months.

The Fed is still likely to view recent softer inflation readings as driven partly by temporary factors but that view is currently being challenged,” BTMU argues.

USD: Rise Of Real Yields To Keep Fed Cautious; USD To Remain In Check – CIBC

CIBC FX Strategy Research argues that while it might be tempting to look at today’s 5-year UST yield and conclude that interest rates have actually eased  financial conditions  so far this year, what really matters for investment and consumption decisions are not nominal yields, but real yields.

“And, there’s no question that  5-year real rates have been increasing.  Both market-implied rates and those calculated using actual inflation data show a general uptrend in recent months,” CIBC notes.

As a result,  CIBC expects the Fed to remain cautious into year-end but still sees some upside for Fed hikes versus what’s now priced.

CIBC expects the USD to stay in  check over the second half of 2017 as a result.

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