The Fed will release its statement and the federal funds rate at 7:00pm GMT tonight. A half hour later Fed Chair Jerome Powell will hold his press conference. It is widely expected that the rate will be held at current levels. However, the market will be very interested in the communication made regarding the monthly $60bn purchases of T-Bills, which began in October of last year. It’s also worth noting that a lending facility was made available for a smooth running of the overnight repo market. In essence, these have resulted in liquidity being injected into the market.
In the above chart, the green vertical approximates with the timing of the injection. The USD subsequently declined as money supply increased. Technically, the USDOLLAR dropped below its 50-day SMA. However, the greenback moved back above the SMA on 17 January and the RSI is now comfortably on the bullish side of 50. Given that the market is widely regarded as a discounting mechanism, it may be anticipating a change to the T-Bill purchases and repo market facility. I.e. the Fed may be looking to stop the asset expansion of its balance sheet.
If this is the case, it may support the USDOLLAR further as the balance sheet plateaus. Furthermore, if this is the case, it will have ramifications because the trend direction of the buck tends to ripple through to other financial instruments. We continue to monitor.