EUR/USD, USD/JPY, DXY flows: mind the gap - dots have a large one to bridge...
Looking back at the June SEP, dots shows what a large gap has developed to current mkt pricing
Uncertain, mixed FOMC may struggle to validate that leap and leave quite a large divergence behind
Interesting to judge markets' reaction to disagreement.
MMKT and bonds have got oversold in recent acceleration, so may be due a yield pullback from the psychological 5% level fast test
Looking back at the last SEP projections and the central tendencies highlights that there is a large gap to bridge versus current market pricing if the FOMC today is to go any way towards validating what is priced in. That may be a challenge given the mixed views on the board and the more 'on the fence' position adopted by many regarding inflation, albeit this before the latest round of geopolitical and energy escalation.
Looking at the June projections, the gap to latest widens out to just under 90bp out to almost 125bp out to 2027-2028 last time, albeit with current implied rates including an unspecified premium, especially for policy uncertainty.
Approximate end-2027 current pricing is actually right at the very top of the most hawkish dot last time around and 2028 is well above the full range, the proviso about premia given. In more general terms, it will also be interesting, if less market moving, to see what they have to say about the long run rate too.
If indeed it does end up being a dovish or non-hawkish hike relative to market, beyond the initial headline kneejerk moves, the key issue perhaps is whether that tempers market pricing at the short end and dollar, or whether the market sticks to its guns, 'fights the Fed' as it has been increasingly empowered and emboldened to do, and sticks with its more hawkish hedging stance.
Somewhere between the two perhaps? The market has got rather oversold across the money market to bond complex in the last few weeks so that positioning does play to potential short-term (price) bounces. US10 yields have got a bit stretched on the fast run to test resistance at and just through the big psychological 5% level, so could be primed for a yield pullback, albeit set against the recent strong longer-term trend. On any decent corrective move further ahead, yield support comes in around 4.8%~.