The forex market is on edge ahead of both the FOMC and the Bank of Japan meetings that are scheduled for Tuesday and Wednesday of this week. While divergent paths are expected, there is little conviction that the Fed will pull the trigger on Wednesday.  The markets are hoping that the Bank of Japan will surprise market participants with unusual methodologies and possibly move deeper into negative interest rates.

In the U.S., it’s of course the FOMC meeting which dominates the landscape. While the outcome shouldn’t be a surprise, there will be considerable anticipation over the new economic forecasts and dot plot, and what they’ll suggest about the future course of policy.  Despite August data that has been weaker than expected, the debate still remains as to the timing of future normalization.

This meeting includes a Yellen press conference, which will broaden the communication of future moves through a question and answer period. It is highly unlikely the FOMC will continue the path of normalization which is reflected in Fed funds futures which reflects a change of a change in interest rates at approximately 20%.

Along with the rash of disappointing data, Yellen’s penchant for patience, a desire not to surprise the markets, and ongoing concerns over slow growth overseas, could keep the central bank on the sidelines this week. Hence, the policy focus will shift the potential for a hike at the December 13, 14 FOMC. Note the November 1, 2 meeting is pretty much out of the question given the proximity to the November 8 elections. December then becomes a good bet, if the commentary that is hawkish, even though Fed funds futures are only predicting a 50% chance of a move, as many of the doves have recently voiced a desire to get back on the normalization track. Growth should also be back in the 2.5% are, while inflation is showing signs of accelerating.

The Federal Reserve will release its forecast revisions on Wednesday in conjunction with the policy statement. Minor revisions are expected to the official 2016 high-end estimates for GDP and PCE chain prices, alongside small boosts to the 2016 low-end core PCE chain price and jobless rate figures, that largely leave the near-term June macro outlook intact.

More importantly the question will be what the Fed shows as their distribution of dot-plot forecasts for the Fed funds rate across the forecast horizon.  For example, many expect a reduction in the dot plot to incorporate consensus expectation of just one policy tightening before year-end, and not the two that were unrealistically incorporated into most of the June estimates. The revisions will likely not materially alter the FOMC growth and inflation outlook. There should only be a brief hiccup in the Treasury market too, though yields are likely to remain elevated as a year-end hike is priced in.  Higher treasury yield are likely to keep the U.S. dollar bid, especially as the Bank of Japan and the European Central Bank wrestle with greater stimulus.