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Volatility ringing the bell with FOMC and BOE minutes under focus

Today is the most important day of the week with the FOMC meeting setting up the stage of volatility for traders. While you cannot deny that the press conference and the statement will not blind folds the FOMC members when it comes to Athens, but the primary focus for them will be the health of the U.S. economy. However, we live in such a connected world these days where the consequence of one incidence does have an impact on the rest of the world. Therefore, the Fed is paying close attention to the situation taking place in Greece and flashlights of Lehman crisis must be occupying their minds.

So far, the blame game continues and the arguments are even more violent with no signs of both sides adopting a more flexible approach by understanding each other’s perspective. It is like that both parties have either given up or waiting for the last minute, and wait and see who will blink first. Only if this was a game, then you could say that yes, it is very thrilling and interesting, and I give this a five star rating, but unfortunately, it is not a game. The outcome will have a serious impact and ripple effects will be even worse and this will be magnified in today’s FOMC meeting.

The domestic situation will also gain much popularity among the Fed members with wage inflation ticking higher- a parameter which the Fed has been waiting for some time. However, the inflation data is still benign and this may keep the Fed to hold their horses. Although, a rate hike as an outcome of today’s meeting has no odds in its favour, nevertheless the September time table remain very stable for such an event. But, the odds are divided between hawkish and dovish tone, and given the performance of the second quarter is fading the impact of the first quarter’s GDP, a more optimistic tone could be the final noise of this meeting.

The Fed will reconfirm that their decision is at the mercy of the economic data. As the economic data prints more durable numbers, this will erect their hawkish tone and the possibility of a rate hike taking place this year could even be higher.

Moving away from the FOMC, we also have another important economic event scheduled this morning. The Bank of England’s minutes will be published this morning and they can equally make some noise in the market. Traders will be focused towards the tone of these minutes and will try to sense when the BOE is going to increase the temperature on a rate hike. Although, one hurdle is over- the UK election, but the Brexit remains as the real threat. Nevertheless, MPC members may not consider that as a major denominator for now and we believe they will increase the heat for a rate hike very soon. The economic data released yesterday confirmed that deflation is not a threat for the UK economy and it will ease the headache for the BOE.

The unemployment data is due for the UK and most significant element will be the average earning. The forecast is for a robust number for the average earning and it could print a reading of 2.5%. An improvement in the average earnings for the private sector will be of immense importance for the MPC members and this is only of the key reason that we think that the BOE could very soon change its tone towards a rate hike.



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