The FX market goes into this FOMC meeting in a mildly dollar-bullish frame of mind. In fact, it was the last FOMC meeting in late April and the dissent against the easing bias which laid the foundations for the dollar rally on better US data over the last six weeks.
A removal of the easing bias in Wednesday’s statement is widely expected and, as usual, the market will probably react to the median expectation for the policy rate over coming years. This presumably could present some upside risks to the dollar.
When it comes to the press conference, it is probably too early to expect Chair Warsh to push back against market expectations of Fed tightening. After all, the economy and asset markets are already performing well in the face of this energy shock.
Our FX bias would be for the dollar to stay bid against the relative low yielders and whose central banks are trying to look through the inflation shock. Depending on what is happening to energy prices and the risk environment, pairs like USD/CAD and USD/SEK could stay bid, while GBP/USD could stay offered. EUR/USD may well press 1.15 again, but the prospect of another European Central Bank rate hike in July should provide some insulation.
Wednesday’s FOMC will come a day after the Bank of Japan meeting. A BoJ rate hike to 1.00% is widely expected, but deeply negative Japanese real rates leave the yen vulnerable. A slightly hawkish FOMC meeting could send USD/JPY well above 160 again and elicit more intervention. Japanese authorities are well aware, however, that intervention is just a containment exercise until energy prices come a lot lower, markets start to think about Fed easing again, and Japanese real rates are much closer to neutral. That looks like a story for the end of this year at the earliest.