Here’s a look at how the curve in Fed funds futures have changed since a month ago and at the start of this month:

It may seem like an eternity but it was just four weeks ago that traders were still convinced of three rate cuts by the Fed before year-end.

That pricing was ultimately reversed and it helped to spur a dollar rally in May. And earlier this month, there was still some consideration about a rate hike for June but after since talks of a „skip“ came about, we have seen that settle to where we are now.

But looking out to the end of the year, traders are quite convinced of a higher for longer narrative by the Fed.

And as policymakers are set to keep rates unchanged today, it will be a question of whether or not they can convince markets that the narrative has not changed.

If the Fed chooses to „skip“ this meeting, everyone is anticipating a hawkish pause of sorts. However, how will that look like?

For one, Powell surely cannot pre-commit to a rate hike in July. As usual, I would expect him to stress on data dependence but at the same time reaffirm that the Fed’s job is not done yet. So, if traders are hoping to get confirmation that this is just indeed a „skip“ and not a „pause“, they may end up being disappointed.

That’s a big downside risk for the dollar and it will be a key consideration for risk assets and bonds later in the day.

Besides that, there’s also the focus on the dot plots and economic projections. If that reaffirms a more hawkish narrative, what should markets focus on in the aftermath? Powell’s remarks/guidance or the overall outlook among Fed members?

Seeing as how markets have set up for the Fed to stick with a higher for longer narrative, I fear that the risk is skewed towards a disappointment. But as we saw with the US CPI data yesterday, the reaction may not be too straightforward.

This article was written by Justin Low at www.forexlive.com.