USD/JPY up a half-cent on the day
The US dollar continues to climb in the countdown to the FOMC decision.
The implied probability of a hike is just 2.8% and a hike today is exceedingly unlikely, even closer to zero than 2.8%.
What's going to drive the reaction isn't the hike/no hike; it's what comes next. A hike at the next meeting on March 21 is priced at 93% so that's a given but what happens later in the year is up in the air.
The best way to frame it is: How many hikes will there be this year?
Given all the excitement in markets globally, a shift to more hikes is certainly possible. The implied probability of four hikes this year is only about 25%. If the Fed signals a more-hawkish path by signaling concerns about rising inflation, or even confidence about growth, then there is a good case for buying the dollar.
The main line of thinking is that the Fed doesn't want to announce any kind of shift until Powell takes over from Yellen next week but there a good argument that she might want to tee up a hawkish shift for him, and that there's some urgency to do it. It would then sound more like a team decision than Powell steering the Fed in a new direction. I'm sympathetic to that view.
The next question is: How much can the dollar rally. USD/JPY is usually the best conduit. I could see a return to 110.19 in the aftermath of the decision.
The FOMC statement is due at 1900 GMT (2 pm ET).
Check here for more FOMC previews.
Join the conversation in our new Telegram group
