A few moving parts TBA

Just a few bullet points and thoughts as you must have exploded your eye nerves already on what’s to read on today’s FOMC.

  • Rate hike? Has to be done. No hike is 100% surprise to express it the other way around. Real interest rates are still sub par.
  • Dot plots 3 or 4 hikes this year, 3 or 4 next year, 1 in 2020? Guess moving from 3-3-2 to 4-3-1 would be the new neutral right now. 4-4-1 is even possible with unemployment sub 3.8%, growth steady and inflation on the rise. The latter will be seen as ultra bullish and seen the voters rather unlikely, the 4-3-1 is my expected.
  • IOER raised by 20bps i/o 25 as Fed hinted in previous meetings? Is it their way of hiding bullishness? Not sure the market will attach as much importance to this technicality as economists do.Unless they go for the full 25bps, which could be interpreted as hawkish.
  • Leaving “accommodative” in or out? In a smoothing move they could keep the outlook positive and up and at the same time give it a twist and leave the “accommodative” out to calm the nerves and show they are just on the right rate path.
  • Powell will get some questions about Live meetings, the neutral rate with overshoots allowed putting more pressure on the yield curve, trade war implications and maybe the current impact on EM with rising US rates.

A lot of moving parts but I reckon Powell will try to navigate through the waters in the most neutral way possible. Acknowledging the hard data and the need to act upon them here and now and leaving everything to what’s to come next. That is: act on overheating, dismiss EM woes as a market phenomenon outside of his power and acknowledge Trade “may have an impact”. I’m not in his shoes but I would call every meeting live, adding that the knife could cut both ways if Trade becomes a drag on the economy.

What am I looking to trade? Well I tell you what I’m NOT looking to trade: The algo rip currents. They will be programmed to sensitive and react to every line, dragging sheep around and get weak orders done both ways if they can. Watch out for these as Powell could sway several times to each side of the neutral point in the presser.
I have a scenario in mind, which is far from certain, I have no crystal ball. But I can see a small USD rally as the plots evolve, followed by an algo wave the other side and the eternal ” after any serious event USD goes down anyway” effect. If Powell doesn’t err to much on the dovish side, I may use this second wave to get long USD again as my current idea is for USD to end the day higher. There is a real interest rate differential developing and economic data on each side of the pond are diverging. Until the next Trump move of course, nothing is written in stone these days.
Stick rates on it? That’s the hardest bit. EURUSD my both ends of interest will be 1.1720/30 and 1.1830/40 initially. If bearishness prevails we should at least get a good test of the upper side where enough offers based on data should cap. If bullish, a break of the bottom should open the way to 1.1640.
USDJPY should find bids 109.80/00 and a test of 111 should be possible if my scenario pans out. Cable both ends of 1.33 and1.34 big figure should be the first break/hold indicators.

I’m going flat USD into the data, barring my long term midget short USDMXN where I look to add higher up into the elections.

Stay safe and happy hunting

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