Forex markets looking more to White House than Fed - BOA

The next Federal Reserve policy-setting meeting is looming large, but markets are expecting little from the gathering, according to Bank of America Securities, with  more focus on messaging from the White House than the central bank.

The Federal Reserve meets next week, concluding its latest meeting on Jan. 29, and is widely expected to stay on hold after its relatively hawkish message in December.

“We view the January Fed meeting as mostly a placeholder,” said analysts at Bank of America Securities, in a note dated Jan. 22. “The Fed will most likely stay on hold. After the FOMC delivered a hawkish message in December, a hold in January was clearly the base case. The data flow since then has validated more hawkish market pricing. In particular, the labor market seems to have stabilized around full employment.”

Fixed income markets currently project a 99.5% chance that interest rates are held steady at their current level of 4.25% to 4.5%, according to the CME FedWatch Tool.

Investors do not expect a large shift in policy guidance at this meeting and little push back on the recent Fed pricing shift. 

“The FOMC statement should be little changed,” BOA added. “One potential revision would be to upgrade the description of labor market conditions from ‘Since earlier in the year, labor market conditions have generally eased, and the unemployment rate has moved up but remains low’ to ‘Labor market conditions have stabilized in recent months, and the unemployment rate remains low’.”

The foreign exchange market is currently more focused on messaging from the White House than the Fed, the US bank added. 

“Greater uncertainties (and sources of FX volatility) continue to stem from the outlook for trade policy, while the more near-term Fed implications (ie the January FOMC) appear more relatively benign."

 

Source: Investing.com