Bank of America Merrill Lynch on the Fed meeting
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 short-lived. 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.
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