TODAY'S THE DAY - Although Wednesday's Fed decision is getting most of the attention this week, market participants need to be mindful of the fact that today's CPI data out of the US probably carries with it more central bank event risk than even tomorrow's actual rate decision. The point being that inflation is a major variable in the Fed's equation for policy reversal. We have already seen unemployment drop back below 6.5% for two consecutive prints, and if inflation ticks up towards the 2% target today, this could set the wheels in motion for a critical change in the Fed's thinking, and speed up rate reversal expectations. But we wouldn't necessarily feel the impact of this in tomorrow's decision, and would probably have to wait for the next decision for this to officially play out. But since the last policy decision, unemployment has come in again below 6.5% and inflation has ticked up. So already since the last decision, there is good reason to expect a little more hawkishness from the Fed tomorrow (or at least less dovishness).
LOOKING ELSEWHERE - I have spent a lot of time talking about the anticipated pullback in US equity markets as the reality of a sooner than later rate hike starts to get digested amongst investors. So today, I will talk less about this and more about the potential implications on the currency side. While the US Dollar implications are also of major interest to markets, and the US Dollar should broadly benefit in a Fed tightening environment on the narrowing of yield differentials back in the USDs favour, I will also steer away from discussing the US Dollar today. For me, the currencies that could be real interesting to watch are the other two major currencies that have a history of finding demand on waning investor risk appetite.
THE OTHER MAJORS - The Franc and Yen haven't done a whole lot of anything this year, with both currencies suffering the same fate as the rest of the financial markets, with ultra low volatility. But both of these currencies are trading near some critical psychological and political barriers, which if broken, could really open the door for a major surge in broader volatility. EUR/CHF 1.2000 is the key level to watch with the Franc, as this is the line in the sand the SNB has drawn, and will defend at all costs. Meanwhile, although the USD/JPY 100.00 level is less dramatic, the psychological implications of a break below this level, would be quite significant, particularly in a risk liquidation environment. So while at this point, this is purely an academic exercise, it also isn't that far fetched to see a scenario where these major levels could be tested. All of this is fascinating in my opinion and could have a major impact on the global macro picture.