3 reasons the dollar could rally (even without a rate hike)
1. Economic projections and the “dot chart”
This month’s meeting marks one of the quarterly meetings where the central bank will update its Summary of Economic Projections, with specific year-end forecasts for economic growth, unemployment, inflation, and of course, the so-called “dot chart” of interest rate expectations. After the slow start to the year, FOMC members are likely to revise down their expectations for economic growth for 2015 (potentially revising up 2016’s anticipated growth to compensate). On the other hand, the continued recovery in the labor market may even should keep the expected year-end unemployment rate steady near 5.0%.
The two most important aspects of the Summary of Economic Projections will be the anticipated inflation rate and the expe3cted number of interest rate hikes this year. In March, the committee expected Core PCE inflation to come in at 1.3-1.4% at the end of the year, but policymakers could revise that figure higher in the wake of the strong average hourly earnings and other inflation data. Meanwhile, the dollar’s immediate reaction to the release may hinge on the median year-end interest rate expectations; in other words, how many interest rate hikes do Fed members anticipate this year?
The mean expectation was for rates to finish the year at 0.675%, meaning that FOMC members anticipated two rate increases this year, but after the Q1 slowdown, some members may have pushed back their timeframe for “liftoff.” If the median year-end interest rate expectation falls to just 0.375%, representing just a single rate increase the year, the dollar could suffer.
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