Fed to keep rates steady, unlikely to send a strong message of an imminent policy tightening

U.S. Federal Reserve policymakers meet on April 26-27 and markets largely expect that interest rates will be kept steady with a slim possibility of a surprise hike. Focus will be on the press statement and whether there is a shift across the Fed members to a more hawkish stance.  Even subtle changes in the wording of its statement will tell us a lot about the probability of a June hike. Recent comments have been far more hawkish than the market is currently pricing in on rates. 

"I don't think they can pull off a June hike without triggering another round of volatility, and they don't want that because the selloff in January and February left a deep scar. The FOMC can't go too hawkish overnight because markets aren't pricing in anything close to that." said Aneta Markowska, chief U.S. economist at Societe Generale.

Data have been mixed since the previous meeting. The labour market data have been strong. Inflation has fallen back somewhat, while market based inflation expectations have risen. GDP was revised up to 1.4% (saar) for Q4, but growth has likely slowed in Q1. Business confidence has improved, while consumer demand has slowed. Financial markets volatility has abated, and commodity prices have risen. The trade-weighted USD has weakened. 

Some broad macroeconomic indicators support the view that the economy is continuing to expand, albeit at a slower pace than in 2014 and 2015. However, weakness in retail sales and international trade, as well as concern about China's economy, are among reasons Fed Chair Janet Yellen will stay cautious about further rate hikes before the second half of the year. Fed may need more tangible evidence of higher inflation and growth before it makes any move towards normal levels of interest rates.

"Although the environment is calmer than it was earlier in the year, we doubt that officials will want to send an “all clear” signal. We expect international considerations to be mentioned again and to be a regular feature of future statements." said Daiwa Capital Markets in a report.

US Dollar was trading weaker across the board on Monday. EUR/USD was up 0.36% on the day at 1.1259, while USD/JPY was 0.63% down at 111.08 at 1100 GMT.