FX Update: Bar is high for meaningful FOMC surprise with other irons in the fire.

FX Trading focus: What if FOMC doesn’t really matter?

Of course the FOMC will matter if the FOMC comes out with a decidedly hawkish tilt this evening, but I consider that highly unlikely, even if a few dots on the dot plot could continue to highlight the widening divide in views on the desirable course of Fed policy and the median lift-off time frame could shift forward another quarter with more dispersion in forecasts. Elsewhere, we are likely to get a more hawkish outcome than the market has been looking for in recent weeks on the taper message, though others have convinced me that this is now becoming the consensus view, taking the sting out of the potential for a market reaction to the Fed indicating a desire to get going asap with tapering purchases and possibly even at a relatively rapid pace of 20 billion or more reduction per month. This doesn’t mean we won’t get a market reaction, just that what happens in the wake of tonight’s meeting may have little to do with what Powell and company say and forecast in the accompanying materials, whether marginally more hawkish or significantly more dovish than expected.

That’s because I suspect that  the medium term questions that this market is grappling with have little to do with Fed policy at the margin, and far more to do with the course of inflation and massive headwinds for real growth due to snarled supply chains and constraints in the labour market. And more immediately, we have the concern over the US debt ceiling and risk of a US government shutdown and US Congressional brinksmanship that is drawn out until December or even later. Then there are the implications of even an orderly Evergrande wind-up, etc. And as we head into 2022, we will have a US treasury that will need to play catchup on issuance, potentially spiking US yields higher as the Fed is stepping away from its support, while a fiscal “cliff” lies ahead next year if the dysfunctional US Congress can’t put together a significant stimulus package, one that, even if passed, would risk feeding straight into inflation anyway rather than real GDP growth, given the constraints noted above.

Chart: EURUSD
The euro may trade with relatively low beta to the US dollar direction in the wake of tonight’s meeting. If US long yields come a bit unglued and trade sharply higher, however, whether due to what the FOMC brings to the table or because the market is looking forward at other issues from here, the euro and yen could weaken more sharply versus the US dollar than otherwise, trading with high beta to any rise in US treasury yields. Regardless, the level to watch in EURUSD remains the low of 2021 down at 1.1664, a break of which on the close today opens up for a test toward perhaps 1.1500 in the days to weeks to come. Looking lower, a massive level is the 1.1290 area 61.8% Fibo level of the rally wave from the lows early last year to the 1.2350 area high posted in the first week of this year.