BofA: Scenario analysis for USD expected reaction to July FOMC on Wed

Synopsis: BofA anticipates the Federal Reserve will keep its policy rate unchanged in July, signaling progress in reducing inflation while maintaining a data-dependent approach for future rate cuts. The USD’s reaction will hinge on Chair Powell’s tone and any hints about a September rate cut.

Key Points:

1. Policy Rate and Inflation:

   • Unchanged Policy Rate: BofA expects the Fed to keep its policy rate unchanged in July.
   • Progress on Inflation: The Fed is likely to signal that progress in reducing inflation has resumed.

2. Future Rate Cuts:

   • Near-Term Cuts: The Fed is optimistic about the likelihood of near-term rate cuts but is not expected to signal a definite cut in September.
   • Data Dependence: Future rate cuts will depend on upcoming economic data.
   • Powell’s Communication: Chair Powell is expected to indicate a shift from a singular focus on inflation to a more balanced reaction function, allowing for cuts based on economic cooling, inflation slowing, or both.

3. Market Pricing:

   • Current Market Expectations: Markets are pricing in a full cut in September and roughly 2.5 cuts by the end of the year.
   • Fed’s Stance: The Fed does not need to signal a September cut but may mildly push back, emphasizing data dependence.

4. Scenario Analysis:

   • USD Sell-Off: For the USD to sell off, the market would need to hear a concerned tone on the labor market that confirms market pricing and implies greater risks for more assertive easing.
   • USD Rally: A USD rally would likely require pushback from Powell on market pricing for September, re-emphasizing the importance of upcoming economic data.

Conclusion: BofA expects the Fed to maintain its policy rate unchanged in July, with a focus on progress in reducing inflation and a data-dependent approach for future rate cuts. The USD’s reaction will depend on Powell’s tone and any signals about a September rate cut, with the market currently pricing in a full cut in September and additional cuts by year-end. The July FOMC meeting is likely to be a placeholder, with limited scope for a sustained move in the USD, while upcoming economic data and Powell’s Jackson Hole speech will provide further guidance.

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This article was written by Adam Button at www.forexlive.com.