Half the score for technical merit, the other half for artistic impression
The intrigue around Wednesday's Federal Reserve decision revolves around fresh action but in terms of the US dollar, the overall impression will ultimately be equally important.
The consensus view on the 1900 GMT statement is that it won't contain any fresh action but there is a significant minority view that the FOMC will introduce a change to the weighed-average maturity of its QE portfolio. This would mean a shift to more long-dated bond buying and less at the short end, resulting in a slightly more-stimulative environment.
The bond market is the main axis to express a view on whether they act or not, particularly the long end. A lack of action will result in another test of 1% in the 10-year Treasury note. I don't think they will because Congressional stimulus looks likely (or at least possible) and because comments from Fed officials suggest they want more time to evaluate.
What about FX? The direct pass-through is modest but if 10-year yields are pushed lower and it looks as though they're capped below 1%, then the dollar will slide.
The larger effects are indirect.
If the Fed opts to act now and continues to signal a dovish stance, then it's a green light for risk trades in the bigger picture and that will lead to a large secondary slide in the dollar.
What I think happens is that the Fed doesn't make a move but highlights a strong willingness to move later and re-iterates a highly-accommodative stance. There might be a knee-jerk higher in the dollar if no action is included but I think that will be a move to fade. The overall impression is ultimately as important as the action and I'm confident that Powell will continue to pledge support for workers and businesses until full employment has been achieved again.
If he can finesse that in the statement and through the press conference, then it will keep all the current trends intact -- USD weakness, equity strength, commodity strength, including in gold.
What if I'm wrong?
The tail risk is that Powell signals less willingness to do more. The impression would have to be that rates have bottomed and the Fed has moved firmly to a neutral stance.
If that's the case, then dollar bears will be in for a punishing day. Equities will fall and growth-sensitive commodities will sink. It would signal a faster regime change and hint that the Fed is having second doubts about keeping rates zeroed out until 2024.
