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Analysts at MUFG Bank, expect the FOMC next week to underline its commitment to providing substantial stimulus, which will keep the dollar on a weaker footing going forward.

Key Quotes:

“We are close to the end of a tumultuous year and Wednesday will bring possibly the last major macro event of the year – the FOMC meeting that we believe will be hugely important in validating the now consensus view of US dollar depreciation next year. We forecast around a 5% depreciation on a DXY basis by end-2021.”

The FOMC and Chair Powell have a tricky task next week. The Summary of Economic Projections from September were far too pessimistic and will undergo some considerable revisions – real GDP in 2020 for example will be revised higher from -3.7% to -2.7% (assuming a 4.0% Q/Q SAAR Q4 print). The unemployment rate at 6.7% in November means the Fed’s Q4 forecast of 7.6% in September was also too pessimistic. But the Fed’s communication is likely to put much more emphasis on the downside momentum and risks to the economy over the short-term.”

“More explicit guidance without some actual QE changes would prove somewhat disappointing given its new monetary policy framework requires the Fed to highlight a change in its reaction function in order to achieve a higher inflation target than before.”

“We expect the FOMC to announce changes to QE along with providing more explicit guidance on QE with the outcome being increased market expectations of yields being lower for longer. That will be an important anchor in keeping real yields in negative territory. The 10-year real yield currently remains close to -100bps.”