Home » US Federal Reserve Preview: Interest rates expected unchanged, dot plot to steal the show

US Federal Reserve Preview: Interest rates expected unchanged, dot plot to steal the show

by FX BrokerNews
  • The Federal Reserve is widely anticipated to keep interest rates unchanged.
  • The revised dot plot and Fed Chairman Powell’s remarks could provide important clues about the policy outlook.
  • The US Dollar could find extra legs in case of a hawkish outcome.

The Federal Reserve (Fed) is poised to unveil its monetary policy decisions following the March meeting, accompanied by the revised Summary of Economic Projections (SEP), colloquially known as the dot plot, on Wednesday. Market observers widely anticipate that the US central bank will uphold the policy rate unchanged within the range of 5.25%-5.5% for the fifth consecutive meeting.

According to the CME FedWatch Tool, the likelihood of a rate cut in May is minimal. Consequently, investors will meticulously analyze the SEP and remarks from Fed Chairman Jerome Powell to ascertain the likelihood of a potential policy shift in June. Current projections from the FedWatch Tool suggest a 43% probability of the Fed maintaining rates unchanged in June.

The dot plot released in December indicated that policymakers envisioned a total reduction of 75 basis points (bps) in the policy rate for 2024. Furthermore, it highlighted Fed officials’ expectations of inflation averaging 2.4% in 2024 before reverting to the 2% target by 2026.

Since the December policy meeting, macroeconomic data releases have revealed a slight uptick in both consumer inflation and producer inflation during the initial months of the year. Additionally, the labor market has shown resilience, while forward-looking indicators such as PMI surveys suggest that the US economy is likely to steer clear of a recession.

In anticipation of the Fed event, analysts at TD Securities anticipate that the FOMC will maintain the Fed funds target range at 5.25%-5.50% in the upcoming week. They expect Chair Powell to advocate for patience regarding the Committee’s next policy moves amidst recent signs of inflation firming up. Additionally, they anticipate the Fed to uphold its median projection for three rate cuts this year, along with the release of preliminary details regarding quantitative tightening (QT) plans.

When will the Fed announce policy decisions and how could they affect EUR/USD?

The Federal Reserve is poised to announce its interest rate decision and release the monetary policy statement alongside the Summary of Economic Projections (SEP) at 18:00 GMT, followed by Chairman Powell’s press conference at 18:30 GMT.

If the new dot plot reaffirms officials’ preference for 75 bps cuts, markets may lean toward a pivot in June, potentially triggering a decline in US Treasury bond yields and weighing on the US Dollar (USD). Conversely, a projection favoring a 50 bps reduction in interest rates could be seen as a hawkish surprise, boosting the USD amidst signs of a healthy labor market and stronger-than-expected inflation figures. However, if the projection maintains a 75 bps rate cut with an upward revision to the 2024 inflation forecast, it could help limit USD losses.

During the post-meeting press conference, Chairman Powell may refrain from commenting on the timing of the policy pivot and reiterate the data-dependent approach. The USD’s valuation may continue to be driven by changes in the dot plot. An optimistic tone about the inflation outlook and the possibility of a rate cut in June could limit USD gains, even if the SEP points to 75 bps cuts in 2024.

FXStreet Analyst Yohay Elam suggests that investors typically react to the dot plot initially, followed by Powell’s remarks, before reevaluating once the dust settles and analysis of the bank’s message emerges. The long-term reflection of the decision will be reflected in the odds for a rate cut in June, which currently stand at roughly 50-50.

In summary, navigating through the policy statement, dot plot, and Powell’s remarks may be challenging. USD volatility is expected to rise during the event, and waiting until the excitement fades may be less risky to determine the currency’s direction. Clues from bond and stock futures markets the next day could indicate whether markets interpreted the Fed announcements as dovish or hawkish.

Eren Sengezer, European Session Lead Analyst at FXStreet, offers a short-term technical outlook for EUR/USD:

“Following the recent decline, EUR/USD remains near the 20, 50, 100, and 200-day Simple Moving Averages (SMA), while the Relative Strength Index (RSI) indicator on the daily chart struggles to hold above 50, reflecting buyers’ hesitancy.

“If EUR/USD stays below the 1.0870-1.0840 area (20-day SMA, 50-day SMA, 100-day SMA, 200-day SMA) and confirms the lower limit of this range as resistance, technical sellers could take action. In this case, 1.0785 (Fibonacci 50% retracement of the October-December uptrend) and 1.0700 (Fibonacci 61.8% retracement) could be seen as the next bearish targets. On the upside, 1.0950 (Fibonacci 23.6% retracement) aligns as strong resistance before 1.1000 (psychological level) and 1.1100 (end-point of the long-term uptrend).”

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