Its widely expected that the FOMC will hold policy steady and signal that the next likely interest rate hike will come in March. Therefore, the focus will be on the language around the meeting. Today’s statement, in our view, will acknowledge that inflation risk have shifted upwards but no material change. We could see a shift from characterizing the economic outlook from “”Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.”” to just “balanced” give the quality of upwards data surprises. However, dragging expectation is the fact that inflation pressure remains subdued, allowing the fed to keep their options open. Inflation on a rolling 3 month average continues to print below the FOMC’s target of 2% while December’s core CPI data suggest trend inflation firming below the feds started goal. Markets continue to discount a hawkish fed, which could catch the ultra-short USD positioning flat-footed. US-G10 yield spread have absolutely blown out; increase our concern for a near term USD correction. Given the stretched nature of US-German spreads we see EURUSD as the most vulnerable to a pullback.
By Peter Rosenstreich