18.06.201901:21 Forex Analysis & Reviews: Fed may completely surprise with a "hawkish" rhetoric

What will the Fed present this week, and will it be enough for the market to recognize the further course in the policy of the US regulator? For the time being, the dollar remains in force, despite the inflated bar for the "dovish surprise".

Market participants previously sold dollars, as confidence in several rounds of rate cuts increased during this year. But Friday's data eased concerns about a recession in the economy against the backdrop of trading against China, and traders succumbed to euphoria. After all, it is difficult to imagine that the US GDP may slow down growth in the conditions of strong indicators on industrial production and retail sales. Jerome Powell has repeatedly stressed that decisions about adjusting monetary policy will be made on the basis of statistical data. If economists are quite happy with the latest reports, then why lower rates?

For example, in Goldman Sachs they consider that a reduction in the rate is just a topic for discussion. In fact, Fed officials will not decide to take such a step in the next two years: this year the data will not allow and the next is a political factor. The fact is that the US will hold presidential elections in 2020, and monetary expansion at this time is perceived as a sign of support for the current government.

Main risks

The market risk is that the US regulator will not only not reduce rates this Wednesday, but will not hint at a possible decrease at the next meeting in July. According to Goldman Sachs, the likelihood of lower rates in the US after two days is a small 10%.

Undoubtedly, Jerome Powell's signal on the Fed's plans for the coming months will be of great importance. Here, traders who are laying down a sharp softening of the policy may face serious disappointment. The derivatives market takes into account four price cuts by the end of next year. At the same time, the median forecast of the FOMC members as of March assumed only one increase.

"The Fed may be disappointed simply because there have been no events since the March meeting, which could have prompted the central bank to cut rates. The stock market rose, the unemployment rate dropped to a 50-year low, and economic forecasts remained the same. The increase in duties on Mexican goods, which provoked speculation on the subject of rate cuts, was canceled," according to an American bank analyst.

Note, the Fed recognizes that the US GDP growth rate slowed down somewhat compared to last year, but overall economic health was not affected. Financial officials will try to avoid hawkish formulations and will confirm their readiness to support growth in the country if the need arises.

This does not exclude the worst case scenario for investors. Here is what can happen, according to banking analysts:

"The Fed is shocking the market with a "hawkish statement"; the United States and China will not make progress in negotiations at the G20 summit. Against this background, the S&P 500 will collapse below 2650, the yield on 10-year-old Treasuries will go below 1.50%, and the gold and VIX volatility index will show a powerful jump."