FXStreet (Delhi) – Derek Halpenny, European Head of GMR at MUFG, suggests that if markets had behaved themselves and the US economy was growing strongly the FOMC may have felt confident enough to insert a reference to “the next meeting” as it did last October prior to raising rates in December. Key Quotes “That reference to a possible rate increase in March certainly will not be in this evening’s FOMC statement and more likely will be a reference to “monitoring developments abroad”, which was included in the September FOMC statement following the financial market turmoil after the devaluation of the renminbi in August. The FOMC may also cite “recent financial developments” as possibly having an impact on inflation expectations. Measures of breakeven inflation in the US have fallen notably since the turn of the year with the 5-year/5-year forward breakeven rate down about 25bps. The facts are that since the last FOMC meeting: 1) the S&P 500 is down 6.8%; 2) NYMEX crude oil is about 17% lower; 3) the Broad USD index is 2.4% higher (to 15th Jan); and as mentioned 4) inflation expectations have dropped by about 25bps. Crucially though, expectations of rate hikes this year have fallen notably further. The financial markets are now even further away from the FOMC DOTS and hence rate expectations already incorporate the Fed shifting its view about there being four rate increases in 2016. Since the day of the December FOMC rate hike, the Dec 2016 fed funds futures contract has taken 23bps of implied hikes out of the market. The Dec 2017 contract has taken 40bps out. So really today will be more about the FOMC merely confirming the facts that have already resulted in the markets lowering rate hike expectations. However, we do still expect the statement to “nevertheless” highlight that the macro-economic situation remains broadly favourable. “Actual inflation” has shown no sign of declining – indeed the core CPI rate moved higher again to the highest level since July 2012. The jobs market remains robust with 851k new jobs created in the fourth quarter. That is not the type of jobs growth consistent with a weak economy. And wages are also showing some signs of picking up. The hourly earnings annual increase of 2.5% was the highest since July 2009. A perceived dovish statement this evening by the mere acknowledgement of the financial market turmoil since the start of the year may be enough to undermine the US dollar over the short-term. However, we do not envisage any conviction in dollar selling. Indeed, we still expect further dollar strength but more clarity is required before market participants are willing to re-enter that monetary policy divergence trade.” For more information, read our latest forex news.