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May 01 - 10:55 AM

BofA: USD Into FOMC: What to Expect?

By eFXdata  —  May 01 - 09:53 AM

Synopsis:

Bank of America forecasts that the Federal Reserve will maintain its current policy stance at the May FOMC meeting, with a focus on inflation and cautious forward guidance. The anticipated steady approach is unlikely to significantly impact the USD, though market reactions to Fed communications could introduce some volatility.

Key Points:

  • Policy Rate and QT Adjustments: The FOMC is expected to keep the policy rate unchanged and potentially slow the pace of quantitative tightening (QT). This aligns with the Fed's strategy of giving previous policy measures more time to take effect.

  • Inflation Assessment: The Fed's statement is likely to note that progress on inflation has been "uneven," reflecting the complex economic backdrop and the challenges in achieving stable price levels.

  • Press Conference Expectations: In the press conference, Chair Jerome Powell is predicted to emphasize that the policy needs more time to work, and that the next likely move could be a rate cut. However, the committee will remain in "wait-and-see" mode, seeking further clarity on inflation trends before making significant changes.

  • Impact on the USD: BofA anticipates that the FOMC's decision to hold steady and Powell's reaffirmation of the current policy approach will not have a lasting material impact on the USD. However, any unexpected statements or interpretations during the press conference could introduce temporary volatility.

  • Market Focus on Rate Hikes Discussion: Discussions of potential rate hikes may arise during the press conference, and markets will be keenly observing how Powell addresses these considerations. His responses could influence market expectations and trading behaviors in the near term.

Conclusion:

As the Federal Reserve approaches its May meeting with a likely steady hand, the focus remains on assessing and communicating about inflation dynamics. While no significant changes are expected that would alter the course of the USD dramatically, traders should be prepared for potential short-term fluctuations based on the nuances of Powell's communications and the Fed's assessment of economic conditions.

Source:
BofA Global Research

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