The main event next week is the FOMC on interest rates and accompanying press statement. The fact that The Fed will leave interest rates unchanged has been fully embraced by the market, looking for a steady 2.00%. As such, the focus falls squarely on the press statement. We look for the committee to note an uncomfortable increase in inflation expectations and a more pronounced risk of rising inflation on the back of higher food and energy prices. In short, I would say a USD bullish reaction to the initial headlines as the market is likely to focus on the hawkish inflation characterization. However, anything short of the FOMC changing their bias towards inflation or suggesting that current rates are now “accommodative” is likely to see initial knee-jerk gains in the USD dissipate.
Another potential spark to break us out of recent ranges is a fresh wave of carry trade liquidations. Ratings downgrades spanning the spectrum of businesses continue to keep the outlook sensitive, and I think it’s only a matter of time before risk aversion rears its ugly head again. As a proxy for carry trade weakness, I’m looking at 166.70 in EUR/JPY and the 106.50 level in USD/JPY as likely trigger points to major JPY-cross selling.
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