US equities closed higher overnight while dollar also rebounded as markets are awaiting the highly anticipated FOMC rate decision. DJIA rose 156.41 pts, or 0.90% to close at 17524.91 while S&P 500 rose 21.47 pts, or 1.06% to close at 2043.41. More importantly, the rebound in stocks argue that recent price actions were just consolidations and further rise is in favor to test historical highs. The strength in stocks was partly due to stabilization in the energy markets as well as rebound in financials. Dollar index is back above 98 level after dipping to 97.19 and focus is back on 98.90 near term resistance. Nonetheless, dollar is trading down against commodity currencies for the week so far.
Now the market has almost fully priced in a Fed funds rate hike of 25 bps. Anything other than this should be a huge surprise and trigger great volatility in the financial markets. Given the fact that Fed Chair Janet Yellen has, over the past weeks, prepared her colleagues and the public well for such a rate hike, we guess the chance of upside (rate hike of 50 bps) or downside (no change) surprise would be minimal. The focus is now Fed's guidance in the accompanying statement on the future path of interest rate normalization.
A key indicator for guidance is the dot plot. As of the September meeting, policymakers are forecasting interest rates to rise to around 1.38% in 2016 and 2.63% in 2017, before gradually rising to 3.25%. We expect forecasts for 2016 and 2017 would be largely unchanged while the longer-term forecast might be trimmed. The key message of the Fed would be a "dovish hike". While acknowledging that continuing progress in achieving the dual mandate on improvement in the employment market and a return of inflation to the 2% target rate should justify a rate hike in December, policymakers would stay cautious and expect further interest rate normalization would be gradual and, again, depend of macroeconomic indicators.
Elsewhere, Eurozone PMIs will be a focus in European session. Eurozone will also release trade balance and CPI final. UK will release job market data. US will also release new residential constructions and industrial production.