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Jan 27 - 10:55 AM

Credit Agricole: Cautious Fed Stance at January FOMC May Weigh on USD

By eFXdata  —  Jan 27 - 10:15 AM

Synopsis:

Credit Agricole anticipates that the Federal Reserve will hold rates steady at this week’s January FOMC meeting, maintaining a cautious tone regarding future policy moves. The USD could face downward pressure if the Fed signals further easing may be necessary despite recent labor market improvements.

Key Points:

  1. Rate Hold Expected:

    • The Fed is expected to keep rates unchanged, aligning with market consensus.
    • Core PCE inflation, projected to remain sticky at 2.8% YoY, will be a key focus on Friday.
  2. Market Concerns Over Inflation Risks:

    • FX investors remain wary that potential aggressive tariffs and immigration policies under the Trump administration could make inflation more persistent, limiting the Fed’s room to cut rates.
  3. FOMC Messaging Under Scrutiny:

    • Powell’s press conference and the updated policy statement will be closely watched for signals on how the Fed views Trump’s policy mix and its implications for inflation and growth.
    • Despite improving labor market data, the Fed may reiterate that policy remains restrictive and emphasize the need for further clarity before adjusting its stance.
  4. Impact on USD:

    • The Fed’s acknowledgment of the need for further easing, coupled with its reluctance to endorse hawkish market pricing, could weigh on the USD in the near term.

Conclusion:

The January FOMC meeting is unlikely to deliver a hawkish surprise. The Fed’s cautious tone, coupled with concerns about the impact of Trump’s policies on inflation, may disappoint market expectations and apply downward pressure on the USD.

Source:
Crédit Agricole Research/Market Commentary

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