We expect the Fed to maintain the Fed funds target range at 1.00-1.25% at this week's meeting, in line with consensus and market pricing. As it is one of the small meetings, all eyes are on the statement, as there are no updated projections and no press conference.
Given the Fed seems to act only at the big meetings, we think the Fed will wait until September to make an announcement on 'quantitative tightening', despite many FOMC members thinking they should get going 'relatively soon'.
We do not think there will be major changes to the FOMC statement, although it is likely the probability is skewed towards a slightly more dovish tone given inflation has now been weaker than expected for four consecutive months.
Due to the Fed's strong belief in the Phillips curve and given we expect further tightening of the labour market, we think the Fed will hike one more time this year in December.
EUR/USD has gained significantly over the past month, as both ECB communications and the balance of political risks have shifted in favour of the euro. In our view, Mario Draghi and the ECB have already let EUR/USD out of the bottle - and basically paved the way for a continued correction in the FX market of some of the long-standing undervaluation in EUR/USD. We are currently reviewing our EUR/USD forecast, stressing that we see risks skewed mainly on the upside relative to our 6M and 12M targets of 1.15 and 1.18, respectively.
To read the entire report Please click on the pdf File Below: