The Fed meeting is going to get interesting - Commerzbank

Analysts at Commerzbank explained that the old conflict between what the market expects and what the Fed suggests has been re-ignited. 

Key Quotes:

"This does not involve a rate hike expected for today which is completely priced in on the market and which therefore constitutes a non-event. What is decisive for USD is the monetary policy outlook beyond today."

And that is what Fed and market do not agree on, as the rate expectations until late 2018 illustrate."

"Over and beyond to-day’s 25bp rate hike the Fed expects four further rate steps until the end of next year, the market only one or two."

"After the administration of US President Donald Trump, who celebrates his 71st birthday today, has so far not implemented any measures to support the economy the market has abandoned all hopes of inflation receiving a kick-start which is likely to be an important reason behind the market’s more pessimistic rate outlook."

"This view is confirmed by the notable fall in core inflation since February. Against this background a surprise in connection with this afternoon’s publication of the May inflation data (which our economists do not expect) might move the dollar more notably than the Fed decision."

"The inflation data might cause the market to re-evaluate the situation. For the Fed on the other hand that would be more difficult. If it lowers its (rate) outlook this merely confirms the market’s more cautious view so that there would therefore be little reason to trade USD at weaker levels."

"If on the other hand it maintains its view this might almost be seen as a hawkish surprise, supporting the dollar on a temporary basis. However, it is unlikely that the market will suddenly believe the Fed more than it does at present. New information on the imminent end of reinvestments from the Fed’s completed QE programme and the related normalisation of its balance sheet has more potential to move the market. Only if the Fed fails in its communication though."

"It is the Fed’s target to initiate the reduction of the balance sheet with as little effect on market prices as possible. The Fed wants to avoid a “taper tantrum” as seen in 2013 at all costs."

"So far the subdued market reaction to comments from Fed central bankers regarding an imminent start of the balance sheet normalisation suggests that it is likely to succeed."

"Conclusion: the Fed meeting is going to get interesting. It is nonetheless far from certain that the Fed will manage to cause any pickup in USD volatility."