Currency traders, focusing on the U.S. dollar pairs, will likely key in on the Federal Reserve’s comments on U.S. economic growth and inflation, when the central bank concludes its policy gathering Wednesday.
Although interest rates along with some details on the Fed’s balance-sheet reduction are already widely expected, U.S. economic data have been mixed of late.
On Tuesday, for example, building permits rose, while housing starts fell, declining to provide a coherent picture of U.S. economic health and putting pressure on greenback.
“The [Fed’s] comments could be slightly dovish given recent data,” Peter Ng, senior currency trader at Silicon Valley Bank, said.
Some market participants are expecting the central bank to signal the impact of Hurricanes Harvey and Irma, which are likely to knock fourth-quarter growth expectations lower, for example. Harvey flooded much of Houston and knocked out Gulf Coast refineries temporarily, hobbling energy production, while Irma whipped winds and rains throughout Florida.
Hurricanes tend to have an inflationary effect, pushing prices higher. And as consumer-price inflation beat expectations in August—growing 0.4% on the month, compared with forecasts of 0.3%—traders may question whether recent and coming increases are an early read-through from the effect. The August numbers were particularly driven higher by energy, which could be hurricane-related.
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Until the next consumer-price index reading in early October, it will be difficult to tell whether the August figure are transitory, weather swings, industry sources said.
Comments from the Fed about inflation tied to hurricanes might be interpreted as ultradovish sending the dollar
Meanwhile, unemployment numbers have been healthy, with the July figure dropping to 4.3%, down from 4.4% in the previous month, despite the tepid inflation figures.
At the end, the greenback’s performance depends on consistently supportive economic data, said. Ryan Detrick, senior market strategist at LPL Financial.
Read: How much longer this stock-market bull lasts may depend on Fed’s next move
Equally, if the central bank announced the unwinding of its balance sheet to start as early as Oct. 1, the dollar could rally, Detrick added.
The Fed’s balance sheet, which has swollen to $4.2 trillion to $4.5 trillion since the global financial crisis, is due to be reduced—the question is just when and at what pace.
If they trim the balance sheet it will be at a very slow pace not to disrupt asset prices,” Ng said. “The last thing the Fed wants to do is to threaten financial stability.”
Later this month, the Trump administration is expected to reveal details regarding its tax-reform plan, which also has potential to propel the dollar higher. Earlier Tuesday, reports indicated that two Republican senators struck a tentative deal to create a budget that allows for a significant tax cut.
The market appeared to have a relatively muted reaction to that news.