Market awaits Fed meeting (video)

According to reports, the Federal Reserve meeting on Wednesday will see a change in wording in the prepared statement, with “considerable time” removed from the paragraph about Fed expectations of how long the fed funds rate will remain at the lower bound. As US data continues to show the economic outlook improving, the market is obsessed as to when monetary policy will normalise. Janet Yellen has repeatedly kept policy unchanged and remained highly dovish over the last year but it looks as though we are now entering the first phase of prepping markets ahead of monetary tightening. Although subtle, the removal of “considerable time” gives the Fed more discretion to use forward guidance as a tightening tool over the coming months, but actual rate hikes are probably unlikely in 2015. There is little other dollar based data until the middle of the week so expect little movement until then.

The Bank of England minutes and employment change are the key data this week for the pound. Much like the US, no changes to interest rates are expected in 2015 so we are not expecting much in the way of news from the MPC this month. The most interesting update from the Bank this month, and I use the term lightly, is a plan to decrease the frequency of MPC meetings from 12 to 8 per year. The thinking behind the move is to curb excessive focus by the market on short-term market movements. Employment data is expected to show a jump on the back of seasonal hiring, which will probably give the pound a temporary shot in the arm.

Shinzo Abe cruised to victory in the hastily called election this weekend, which should provide a welcome boost of support for the three-arrowed economic reforms called Abenomics, which are still only half way co completion. Support for tough structural reform from the Japanese public was waning and the election aimed to show both a strong mandate for Mr Abe to supposedly postpone a planned sale tax increase. The victory should mean further weakness for the Yen in the coming months.

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