The Federal Reserve is set to release updated forecasts, which are set to trigger the initial market reaction, potentially one that is dollar positive. However, in the view of FXStreet’s Analyst Yohay Elam, Fed Chair Powell could dampen such gains with caution, especially if rejects any early withdrawal of stimulus.
Fed Chair Powell will likely shoot down any talk of tapering the bank’s bond buys
“Any increase in the camp supporting an early rate hike could trigger a knee-jerk reaction In favor of the dollar. Another potential boost for the currency could come if one of the members dissents against the decision. However, a dissent seems off the cards, especially as Kaplan is not a voting member.”
“Apart from playing down inflation and sticking to the ‘transitory’ script, reporters are set to ask Powell about tapering bond-buys. If he flat out rejects that with something along the lines of ‘it is premature to have a discussion about tapering,’ the greenback could suffer. Moreover, if Powell dodges questions about the proper time for such a debate, it could suffer another blow. How far could the greenback fall? It will probably just undo the gains recorded in the initial reaction.”
“More dovish outcomes could include a downgrade of employment expectations, a move that could weigh on the greenback from the outset, especially if accompanied with little movement in interest rate forecasts. Another, less likely, dollar-adverse scenario is one in which Powell vows more action if the government does not provide additional stimulus.”
“The most hawkish outcome would be if Powell says that the Fed is set to discuss tapering soon or the extremely bullish scenario in which he says the bank has had its first such debate now. In this case, which is among the least likely, the greenback could extend its gains.”