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The Federal Reserve convenes as the markets are following every Brexit poll. Nevertheless, this is still a meaningful event. Here is the view from Bank of America Merrill Lynch:

Here is their view, courtesy of eFXnews:

Between weaker May jobs data and uncertainty ahead of the UK referendum on EU membership, the markets have completely priced out any chance of a June rate hike. We concur, as this will give the Federal Open Market Committee (FOMC) more time to reassess global risks and incoming US data. While we cannot completely rule out a July hike, the hurdle for a quick improvement in the data and supportive financial conditions is relatively high.  Our base case remains a September rate hike.

Because this meeting represents a tactical delay by a data-dependent Fed, we do not expect a fundamental shift in the Fed’s outlook. As a result, the statement language and Summary of Economic Projections (SEP) are likely to see relatively few and mostly minor changes, other than marking to market as needed. In particular, despite the market continuing to further reduce the likelihood of a rate hike at subsequent meetings (Chart of the day), we think it is not all that likely the median dot will shift down for this year or the next two.

In addition,  while Fed Chair Janet Yellen is unlikely to offer any explicit signals on the timing of the next rate hike, we anticipate she will likely affirm that the FOMC expects it will be appropriate to raise rates later this year.  As such, the market may view the outcome of the June meeting as slightly hawkish.

inflation expectations drift lower Downwards shift

FX: Can Fed change the dollar’s fortunes?

The weak May NFP report eliminated the possibility of a June FOMC hike. The USD’s price action in response has been severe as it registered its largest daily change on a negative NFP surprise since 2001. Historically, these moves persist  underlying our continued cautious stance.

With a rate move off the table, the USD will likely respond to any signal of action at coming meetings the FOMC gives.  Chair Yellen’s balanced tone in her recent Philadelphia speech suggests we would not see a repeat of the October 2015 statement when the FOMC specifically laid out conditions they wanted to see before raising rates at the “next meeting.”

Such a move would be USD supportive alongside a rise in frontend yields. However, given our expectation for the FOMC to adopt a cautious, data-dependent stance,  it is unlikely the FOMC would significantly alter the dollar’s recent fortunes,  and indeed could weigh on the USD further through a continued decline in real yield differentials.

Therefore, we remain biased toward further USD consolidation around current levels with the focus more likely to be on this week’s BOJ meeting and next week’s EU Referendum in the UK.

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