The Fed will stress its data-dependence

Global investors are awaiting the outcome of the FOMC’s January policy meeting. Stocks and currencies are muted ahead of the important verdict. While nobody expects any changes in the rates, the estimates of the potential rhetoric by the Federal Reserve differ.

Against the backdrop of the latest speculations, one of the key issues for markets is the possible end of the balance sheet reduction plan earlier than previously expected. But Powell will likely refrain from details and decisive statements on the issue, though a hint at such a step could put the greenback under pressure.

The central bank could also revise slightly lower its economic assessment and even adjust the forward guidance, suggesting that the economic activity is ‘solid’ instead of ‘strong’. Also, chances are high that the monetary authorities will emphasize the data-dependence in the context of further rate hikes in the future. If so, the uncertainty will rise but at the same time, it could revive hopes for resuming the tightening cycle some time later this year.

As such, the downside risks for the dollar from the upcoming meeting are limited, and the potential sell-off could be short-lived. And let’s not forget about the US-China trade talks that will set the tone for markets in the days to come.    
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