 |
| Federal Reserve Expected to Raise Interest Rates in Latest Decision, Markets Awaiting Dot Plot Results |
The Federal Reserve is set to raise its policy rate by 25 basis points (bps) to the range of 4.75%-5% on Wednesday, March 22. The market has largely priced in the decision, opening the door for a significant reaction to the Federal Reserve’s communication, the revised Summary of Economic Projections (SEP) and Chairman Jerome Powell’s press conference regarding future policy actions. The terminal rate projection in the dot plot and Powell’s comments on the policy outlook and the market turmoil will provide fresh clues regarding potential future policy steps. After the initial reaction, the focus will shift to interest rate projections. Analysts expect the Federal Reserve to stick to its guns about refusing to slash borrowing costs this year, signaling that rates will near 5.50%. Powell is expected to dedicate significant emphasis and time to the labor market, the Fed's second official mandate, alongside price stability.
Investors had begun to re-price the Fed’s policy outlook following the collapse of two mid-size US banks – Silicon Valley Bank and Signature Bank. However, investors are still forecasting a 25 bps rate increase amid easing fears over a deepening liquidity crisis following the quick measures taken by the Fed. This, along with a positive development surrounding the Credit Suisse saga, suggests that the Fed could stay focused on battling inflation.
The US Dollar suffered heavy losses last week, pressured by falling US Treasury bond yields and the re-pricing of the Fed’s rate outlook. As investors move to the sidelines ahead of the Fed’s policy announcements, the US Dollar Index consolidates its losses. US stock index futures trade mixed following Tuesday's risk rally and the 10-year US Treasury bond yield continues to fluctuate above 3.5%.
The European economic docket will not feature any high-impact data releases on Wednesday, allowing the US Dollar’s reaction to the Fed to drive EUR/USD’s action. Heading into the key central bank event risk, the EUR/USD pair trades with a positive bias comfortably above 1.0700. The Relative Strength Index (RSI) indicator on the daily chart stays near 60, suggesting that the pair has more room on the upside before turning technically overbought. However, a hawkish dot plot combined with Powell’s assurance that they will focus on taming inflation should help the US Dollar gather strength and cause the pair to turn south. In that scenario, the 50-day Simple Moving Average (SMA) is likely to act as dynamic support at around 1.0700. A daily close below that level could open the door for a deeper slide towards the 1.0600 mark.
