2pm ET / 18 GMT – FOMC Statement and Federal Reserve Economic Projections

The Federal Reserve will release its monetary statement 15 minutes earlier this usual to accommodate for the press conference 30 minutes. Expect only minor tweaks to the statement relating to the central bank’s decision to downgrade their growth and inflation forecasts. Unemployment forecasts are expected to remain unchanged. Since GDP and CPI have fallen short of the central bank’s March projections, the Fed will need to adjust their estimates. We expect the central bank to say they continue to see downside risks to the economic outlook. This means their official guidance on interest rates and their asset purchase program will remain unchanged. The Fed will most likely reiterate that they are “prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.” “Monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.” While changes to the economic projections could be mildly negative for the U.S. dollar, the FOMC statement is not expected to deliver any surprises.

2:30pm ET / 18:30 GMT – Bernanke Press Conference

Instead the focus will be on Fed Chairman Ben Bernanke’s post monetary policy meeting press conference. There’s been quite a bit of uncertainty relating to how strong his message about tapering will be. Some believe that he will signal that the Fed is close to tapering while others believe that he will downplay their plans to taper, focusing instead on distinguishing the different criteria for tapering versus tightening. The first thing FX traders should look for is whether Bernanke says that tapering will occur “in a few months.” If so, this would be positive for the dollar because it provides a clear timing for changes to monetary policy. If he avoids speculating on a specific time frame, the dollar will most likely suffer and the extent of the losses will depend on how clearly he details the criteria for tapering versus tightening.
Based on the rise in bond yields and the volatility in the Treasury market in general, we don’t expect Bernanke to be kind to the dollar and most likely he will give the market as little as possible because internally, they haven’t decided when the next step should be taken. Since the central bank last met 10 year Treasury yields increased 50bp from 1.63% to 2.2%. The performance of the U.S. economy has also been mixed (see table below). Knowing Bernanke and his inclination to be ambiguous, investors will most likely interpret that to mean that the Fed’s eagerness to adjust asset purchases has weakened.

The following table shows how the economy has changed since May 1st. Overall, consumer spending improved and job growth accelerated but inflation ticked higher on the consumer level and manufacturing plus service sector activity slowed. Housing market activity is also mixed and taken together, these reports show an uneven but continued recovery in the U.S. economy. For the central bank, the pullback in service and manufacturing activity is another reason why Bernanke may want to avoid fueling expectations for Fed tapering and by extension, drive yields even higher.