The dollar remained under pressure on Tuesday as markets counted down to a crucial Federal Reserve meeting amid speculation it will soon hit the pause button to its monetary tightening cycle in the face of rising risks to global growth.
Expectations of a hike have slipped a shade towards a probability of 70% (according to Fed Funds futures) but it would be a massive shock if the Fed chose not to hike tonight. The arguments for it to be on hold are certainly there (a massive deflationary fall on commodities in recent weeks for one).
However the committee has guided solidly for this hike and a step back would be a real surprise, aside from the credibility angle after President Trump’s unconventional urging for the FOMC to hold off. There has been a real shift in markets in recent weeks as fears over the impact of a global economic slowdown have taken hold.
The US cannot be immune in this and the cracks are showing. Domestically the wobbles are coming too. Housing indicators have taken a turn for the worse (very much a market linked to higher interest rates), whilst inflation expectations have been significantly pared back.
This has pulled Treasury yields lower and equity markets sharply weaker. So the other factor to consider on the FOMC decision tonight will be on forward guidance into 2019. Currently there are three hikes pencilled in on the dots. The market is pricing for less than one.
So this wide disconnect has created a situation where the market does not really know what the Fed will do tonight. With the Wall Street Journal suggesting the Fed could hold off all together, but other expectations for still two or three hikes in 2019, the lack of consensus means we can expect a wild ride tonight.
Wall Street closed mixed with mild gains on the Dow but the S&P 500 was almost dead flat at 2546. S&P futures are showing a rebound of +0.5% today, but this has not helped Asian markets which have been weaker (Nikkei -0.6%, Shanghai Composite -1.0%).
European markets subsequently look rather mixed in early moves today. Forex markets show the corrective drift on the dollar is into its third day ahead of tonight’s FOMC decision, with the euro showing mild outperformance.
In commodities, there is a continued tick higher on gold and silver, whilst oil has rebounded a shade after renewed selling pressure yesterday.