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- 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) will announce monetary policy decisions following the March meeting and release the revised Summary of Economic Projections (SEP), the so-called dot plot, on Wednesday. Market participants widely anticipate that the US central bank will leave the policy rate unchanged at 5.25%-5.5% for the fifth consecutive meeting.
The CME FedWatch Tool shows that markets see little to no chance of a rate cut in May. Hence, investors will scrutinize the SEP and comments from Fed Chairman Jerome Powell to try to confirm or deny a policy pivot in June. According to the FedWatch Tool, there is a 43% probability that the Fed will leave rates unchanged in June.
The dot plot published in December showed that policymakers were forecasting a total of 75 basis points (bps) reduction in the policy rate in 2024. The publication further pointed out that Fed officials saw inflation averaging 2.4% in 2024 before returning to the 2% target in 2026.
Macroeconomic data releases since the December policy meeting showed that consumer inflation and producer inflation started to edge higher in the first couple of months of the year. Additionally, the labor market remained relatively healthy while activity-related data, such as the forward-looking PMI surveys, suggested that the US is very likely to avoid a recession.
Previewing the Fed event, “the FOMC is widely expected to keep the Fed funds target range unchanged at 5.25%-5.50% next week, with Chair Powell likely continuing to argue for patience regarding the Committee’s next policy steps amid the recent firming of inflation,” said TD Securities analysts in a weekly report and added: “We also look for the Fed to maintain its median projection for 3 cuts this year, and for the release of preliminary details about QT plans.”
When will the Fed announce policy decisions and how could they affect EUR/USD?
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).”
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
