Bank of America: FOMC preview risk of USD weakness

16 February,, London – In anticipation of Wednesday’s FOMC minutes, Bank of America Merrill Lynch shared the FOMC preview and their implications to the USD.

FOMC preview

“The minutes of the January meeting should reveal more concern among Fed officials about the global backdrop and the tightening of financial conditions, but stop well short of suggesting the Fed will postpone rate hikes in March or later,” Bank of America expects.

At the January FOMC meeting the Committee indicated it would be “closely monitoring” such risks. Nevertheless, the financial tightening conditions should be “persistent” to prove a risk to the outlook. Given that the FOMC has effectively sopped its discussion of the balance of risks and cited greater economic uncertainty in the statement, Bank of America overall expects the minutes to be modestly dovish.

“We continue to expect the Fed to hold policy steady in March and then hike again in June, under the assumption that markets calm down and the labor market continues to improve,” Bank of America noted.

USD implications

During usual times, FOMC Minutes generally aren’t a key market event. However, as the rates market is now pricing more than 30% chance of an interest rate cuts this year, market participants listen to every Fed word. Moreover, the Critical Stress Signal (CSS) within BOFAML’s Global Financial Stress Index (GFSI) turned to “risk off” for the first time since August 2015.

Bank of America: FOMC preview & USD implications

Dating back, a “risk off” sentiment has resulted in at least a 5% decline in the S&P 500 index in 11 0f 18 times since 2000. The difference this time is that the Fed is no longer able to soothe the market with additional easing (Chart 1). With risk averse sentiment likely to dominate in the near term, Bank of America sees

“continued risk of USD weakness as USD long positions are unwound as rate differentials continue to suggest the USD is overvalued at current levels.”

Consider reading: USD strength & Fibonacci outlook (video)

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