The US Dollar retreated today ahead of a heavily awaited interest rate decision and its plans to reduce its balance sheet.
Markets are expecting Janet Yellen and the central bank to announce that it will start to reduce a $4.5tn balance sheet which has been inflated by the government bond buying scheme or quantitative easing program, used by the central bank to stimulate the economy after the 2008 financial crisis.
This is still expected to be a gradual reduction as to not trigger a sharp sell-off in government bonds and shock the markets. What is more key is the announcement of what speed they plan to reduce the balance sheet.
Another big question is will the Fed choose to hike rates again in 2017? I would personally say that an interest rate hike tonight is pretty much fully off the cards, but what is key for investors and strength for the Dollar is the rate hike plan, which is expected to be unveiled tonight.
Most analysts are currently drawn between one more rate hike this year, most likely in December, and others predict the Fed to start raising again early 2018. Quite simply, if Janet Yellen and the policymakers are positive and think a rate hike can occur this year, I would expect the Dollar to strengthen. If they are bearish (negative) I would expect the Dollar to retreat further against its counterparts. I wouldn’t expect Janet Yellen to give too much away however, the recent events such as the devastating hurricanes in Texas and Florida and their costs to the economy along with heightened tensions between the US and North Korea are likely to play a key part in the distraction as to why the Fed will be coy as to when they will raise interest rates.