The Fed May Drop Hawkish Rhetoric as Strong US Dollar Impacts Earnings

Will the Federal Reserve be the fifth bank to surprise foreign exchange markets this month? How might it do so

Federal-Reserve-Seal-logoJust before the Federal Reserve Open Market Committee’s (FOMC) meeting, the outcome of which will be announced in roughly two hours, it’s worth considering a growing possibility regarding the future course of Fed action.

While this doesn’t have to happen at this meeting, the Fed’s board may well decide to tone down its hawkish rhetoric and cut back on bold statements as it sees a strong US dollar impacting earnings at a number of major US companies in the fourth quarter of 2014.

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Should it do so? In our view, no. That said, the Fed is notorious for surprising markets. Just as it did when it announced in December of 2013 the beginning of the end of the third and final (so far) quantitative easing program.

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Janet Yellen had been a famous “dove” until she became chairman of the Federal Reserve whereupon she suddenly started appearing a touch more “hawkish.”

The division between so-called “hawks” and “doves” on the FOMC is, so far, favoring the latter bunch of the voters. In monetary policy a “hawk” advocates higher interest rates or a more restrictive monetary policy. On the other side of the spectrum are the “doves” who advocate looser monetary policy, lower interest rates and quantitative easing.

The EUR/USD rate has been treading water for the past 24 hours after triggering stops above 1.1400 in late London yesterday. With some tight stops looming all the way through to 1.17, if the Federal Reserve decides to tone down its recent hawkish rhetoric and become the fifth central bank to surprise foreign exchange markets this month, we could see a protracted move higher in the EUR/USD.

EURUSD Chart, Source: NetDania


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