USD: FOMC is the key event risk next week - Westpac

Richard Franulovich, Research Analyst at Westpac, suggests that the 21 Sep FOMC is the key event risk next week for the USD in which the Fed’s dot plot is going to be updated and Chair Yellen holds a press conference.

Key Quotes

“A lack of FOMC consensus and a lack of compelling data likely sees rates kept steady next week. The statement should have a slight hawkish twist though. Conditions are unlikely to be downgraded despite softer Aug jobs and PMIs with Q3 GDP tracking 3%. The Fed may reinsert a “balanced risks” assessment too. The dot plot profile surely has a dovish lean though. The median for 2 hikes in 2016 likely falls to 1 and the median long run rate likely falls again, -25bp to 2.75%. That shouldn’t upset anyone - OIS shows a 52% chance for a Dec hike.

Key risk: there’s a non-negligible chance 2 members (Brainard & Tarullo) leave their dots for 2016 at 0.375%, kickstarting a serious debate whether the Fed will go at all in 2016.

We favour a patch of USD weakness despite recent market wobbles. Subdued chain store/auto sales flag more mild Aug retail sales this week, while a steady Fed and yet more cuts to the dot plot rate projections likely trim the USD’s sails yet further next week.”