From a trading perspective, there is barely any difference between a modest $5-10 billion taper tomorrow or a strong signal about a taper in January.
The mode at the Fed has always been to take the path of least resistance so no taper tomorrow but a signal for January would fit with the pattern under the Bernanke Fed.
In my mind, the difference would be minimal. The market reaction will be volatile if a ‘no taper’ or ‘taper’ headline hits and that’s all the matters for the first 3 minutes of post-Fed trading so there will be a big difference in the knee-jerk reaction but it won’t last.
Sept 18 FOMC reaction in USD/JPY
What will last is a change on the forward guidance and other comments. I think drawing a line under inflation is a good possibility and so is signalling that rates will stay low for longer. Some additional optimism on the broader economy is a given.
The risk? This is a stock market that likes to kick and scream and that could spill over elsewhere.
Overall, the dollar is likely to benefit from a taper or a signal about a January taper. In that case, USD/JPY looks like the best bet. With no taper signals and/or direct warnings about disinflation, the dollar could be in a bad spot. In that case, EUR/USD is likely to break out.
