Fed On Deck, Tankan First

The long-awaited Fed day is finally here, we take a close look. The FX moves on Tuesday were minimal but the S&P 500 continued to break records, adding another 14 points to 2271. The Japanese Tankan is up next. The NASDAQ short was stopped out as the index shot to a new record high. The pre-Fed bideo for Premium subscribers will be posted and send before the Tokyo open.

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The Fed is almost certain to hike rates into a range of 0.50-0.75% on Wednesday so what's important is the rhetoric that accompanies the decision.

The key will be signals on what happens next. The market is pricing in a 13% chance of back-to-back hikes and that rises to 30% at the March meeting. It continues to rise to 65% by June with a further 22% chance of a hike above 1%.

The challenge in trading Wednesday will be interpreting the statement, projections and dots. All three will be released at the same time, followed by Yellen's press conference shortly afterwards.

Expect the statement to include some hawkish hints but nothing that appears to commit the Fed to moving. In the past two years they've made the error of hiking in December and promising more, only to slowly walk back over the subsequent year.

Several market watchers expect a repeat. The S&P 500 is hitting record highs and traders remain optimistic about the Trump administration. That sentiment feels rock-solid at the moment but it can evaporate quickly and that's exactly what happened in each of the past two years.

The dots present a particular challenge because they almost always skew hawkishly. Many might argue that the market has trained itself to ignore the consistently-false signal but dollar bulls could once again get caught up in the excitement. What to watch in particular isn't the absolute levels of the dots but the relative change. If Fed members by-and-large move up their end-2017 dots, that will be seen as a signal and spark dollar buying.

One scenario is that a hawkish tilt in the statement combined with a move in the dots sends the US dollar briefly higher only to retrace. Reversals have certainly been a theme late this year and that's a very real possibility Wednesday, especially in the yen crosses.

Speaking of the yen, it will be in focus at 2350 GMT when the quarterly Tankan is released. The survey is expected to show large manufacturer sentiment up to 10 from 6. Also watch the breakdown of small manufacturers and the services sector.  It will take months of data to shift the BOJ away from rock-bottom but this could be a beginning, or yet another failure to start.