It is a quiet Wednesday in the currency markets. Traders are favoring to remain on the sidelines ahead of multiple key risk events, including the Federal Reserve monetary policy decision later today; the Bank of England’s rate decision on Thursday; President Trump’s nomination of the next Fed Chair; the U.S. tax reform announcement and Friday’s NFP report.
Today’s FOMC meeting will not be accompanied by an update on economic projections, nor by a press conference. Traders have to act on very few amendments on a 500 words statement. The main theme is unlikely to change, and the Fed will stick to its plans of gradual tightening. However, recent economic releases have shown significant improvement in the U.S. economic activity, and GDP has grown 3% for two consecutive quarters, suggesting that we may see slight, positive changes in assessing economic activity.
Despite an uptick in headline inflation in September, core CPI continued to miss estimates, and remained below the targeted 2%. Thus, I expect little to no change on inflation assessment.
Overall, the Fed will likely meet market expectations, by keeping interest rates unchanged in November, and signal a rate hike in its final meeting in December.
President Trump’s nomination for Fed Chair on Thursday could easily overshadow today’s statement, especially if Fed Governor Jerome Powell is not his first choice. Powell has been supportive of Janet Yellen's policy of gradual tightening in monetary policy; thus, I do not expect big moves in Treasuries, or the U.S. dollar, if he is nominated. However, if Stanford University’s Professor of Economics, John Taylor, is nominated instead, expect big moves in Treasury yields and the dollar, which could appreciate sharply against its peers. According to Taylor rule, a forecasting model that determines where interest rates should be, based on targeted inflation and full employment, interest rates should be much higher the current levels.
The Kiwi was the only outperforming currency today, surging 1% against the dollar after labor market statistics showed that the cost of labor grew 1.9%, and the unemployment rate fell to a nine-year low. If wages continue to show signs of strengthening, the Reserve Bank of New Zealand will likely start raising rates next year, as opposed to earlier forecasts of tightening in 2019.