The Federal Reserve is scheduled to announce its rate decision and publish the monetary policy statement alongside the SEP at 18:00 GMT. This will be followed by Chairman Powell's press conference at 18:30 GMT.
In case the new dot plot reaffirms that officials are still favoring 75 bps cuts, this could result in markets leaning toward a pivot in June. In this scenario, the initial market reaction is likely to trigger a decline in the US Treasury bond yields and weigh heavily on the US Dollar (USD). On the other hand, policymakers could favor a 50 bps reduction in the interest rate this year, citing a relatively healthy labor market and stronger-than-forecast consumer and producer inflation figures since the beginning of the year. This could be seen as a hawkish surprise and provide a boost to the USD. A 75 bps rate cut projection with an upward revision to the 2024 inflation forecast could help the USD limit its losses.
In the post-meeting press conference, Chairman Powell could refrain from commenting on the timing of the policy pivot and reiterate the data-dependent approach. In this case, changes in the dot plot could continue to drive the USD’s valuation. If Powell adopts an optimistic tone about the inflation outlook and leaves the door open for a rate cut in June, the USD’s gains could remain limited even if the SEP points to 75 bps cuts in 2024.
FXStreet Analyst Yohay Elam shares his thoughts on the potential market reaction: “I want to stress that the reaction to the Fed decisions is multi-layered. Investors usually react to the dot plot before reversing the initial move. They then respond to Powell's words but may have a rethink once the dust settles and analysis of the bank's message surfaces.”
“The long-term reflection of the decision would be seen in the odds for a rate cut in June, which currently stands at roughly 50-50,” he said.
To summarize, it will not be easy to navigate through the policy statement, the dot plot and Powell’s remarks. The USD volatility is likely to heighten during the event and it could be less risky to wait until the excitement fades away to determine a direction for the currency. The action in bond and stock futures markets the next day could provide a clue on whether markets saw the Fed announcements as dovish or hawkish.
Eren Sengezer, European Session Lead Analyst at FXStreet, provides a short-term technical outlook for EUR/USD:
“Following the latest decline, EUR/USD stays near the 20, 50, 100 and 200-day Simple Moving Averages (SMA) and 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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