The Fed could shock the market, says strategist

[view original post]

The Federal Reserve is about to release a far more hawkish statement than most expect on Wednesday, predicts one currency expert.

“I think given half a chance, they’re going to surprise the market,” BK Asset Management managing director Boris Schlossberg said Monday on CNBC’s “Trading Nation.” “If they say something [hawkish] Wednesday, I think it’s going to give a boost to the dollar – which has been badly, badly beaten up on the assumption that the Fed is going to do nothing for the rest of the year.”

Signs of global economic weakness and market volatility that have followed the Fed’s December rate hike eased investor expectations about the probability of further rate hikes in the months ahead. However, given the slew of positive economic data, Schlossberg says the market may be underpricing the possibility that the Fed will look to hike further sometime in 2016.

“Given the fact that the global financial markets have kind of calmed down, and that everything else the Fed is looking at – price levels, price deflator, employment, all of those things are turning back to positive,” said Schlossberg. “And it puts them back on that flight path.”

While Schlossberg doesn’t believe the Fed will act on Wednesday, he believes their goal will be to change the market’s sentiment – which he says will provide a floor for the dollar going forward.

Of course, higher short-term rates generally translate into a higher currency, at they mean increased returns for those holding that currency.

Not everyone is so bullish on the greenback, however. Oppenheimer technical analyst Ari Wald says the dollar’s bull run is running out of steam.

“Our view is that the [dollar’s] strength is going to be more concentrated going forward,” he said – meaning that the dollar will get stronger against certain currencies, but not stronger across the board.

For instance, the dollar’s performance against the British pound and against the Japanese Yen tell very different stories.

“If $1.45 holds [on the pound], the strength towards the dollar is intact,” said Wald.

However, a more bearish case for the dollar can be made when looking it is compared to the Japanese yen.

“We have a breakdown in trend, pointing to yen strength, and as long as $1.16 holds, the dollar will continue to weaken,” the technical analyst predicted.

Leave a Reply

Your email address will not be published.