Zig-Zag Happening

Market is Zig Zag, before FOMC Meeting.

Decision Inflation Economy Bias Outcome

25 bp Hawkish Hawkish Further hikes USD positive

25 bp Hawkish Dovish Further hikes USD neutral*

25 bp Dovish Dovish Fed is done USD negative

25 bp Dovish Hawkish Fed is done USD negative

* Reference

We believe the most probable scenario for today’s FOMC comments is 25bp hike with strong wording on inflation, acknowledgement of a slowdown in economic activity and a bias for an additional hike in August.

Recent economic readings have shown a clear sign that inflation, driven by higher oil and commodity prices, have filtered into core. May Core CPI inch up to 2.4%, well over the FEDS 2.0% target, an event which worries even the dovish FED members. Another concern of the FED has been over tightening and killing the US economy. This month figures (including today’s f5.6% GDP) have illustrated that the economy is more resilient than originally thought and can handle additional rate hikes.

Should Bernanke’s rate decision and subsequent comments match our forecast, we expect the USD to gain short-term strength as trader’s price an August hike. Note, that this USD momentum will be short lived as we have seen a trend of decreasing support on each additional rate hike and a majority of 5.50% has already been priced in.

However, we believe there has been significant build up in the market, so any strong directional move will trigger a bandwagon effect.