What to expect from the Fed meeting?

A so called “Fed put” has been one of the great market themes so far this year. Concerns regarding an economic slowdown have changed expectations regarding Fed policy, buoying equity markets and halting the advance of USD. The FOMC chairman admitted that policy would need to be adjusted, so now we await official changes. In this analysis we outline what to expect from the meeting and take a look at US500 and EURUSD charts.

Summary:

• The Fed to revise interest rate expectations
• Remarks from Chairman Powell will be important
• US500 cleared resistance, 2018 highs in sight
• EURUSD still in a downward trend

Fed will not hike – but will it admit interest rate cuts?

The latest communication from the Fed has strongly suggested that we will not see any rate hikes in the near future, and the markets will look to the release of the dot-plot for further confirmation of this. The dot-plot from December showed the vast majority of rate-setters saw at least 1 hike in 2019, with some even expecting 3 increases. This will now likely change, but to what extent? The markets already expect a rate cut in 2020, but we do not think the Fed is ready to confirm these expectations. The December release showed the median forecast at 2 rate hikes and it would not be a surprise to see this lowered. 

In addition to the dot-plot, the tone used in both the monetary policy statement and Chair Powell’s press conference may be decisive. Assuming the Fed does soften its stance, the reasoning behind this could be the most important aspect to watch. If the Fed claims it is looking to avoid more rate hikes and signal an end to balance sheet reduction because it sees lower inflationary pressures but still solid growth, then this could be seen as positive. Whereas, if the Fed states it has changed course due to lower inflation that is part of a global slowdown that will also adversely impact the US economy, then it is more negative.

Just 3 months ago the Fed suggested interest rate hikes in 2019 and 2020. Now the markets expect interest rate cut next year. Source: Bloomberg

US500 – all-time highs in sight

A spectacular recovery from the late 2018 correction continues and the US500 has recently cleared the last hurdle – the 2815 level that stopped bulls 3 times in late 2018 and ultimately caused a sharp sell-off in December. There’s also the 78.6% Fibo of the full 2018 correction so this was a strong level. However, it is broken now and could serve as a support with the resistance being at all-time highs, just 100 points away.

EURUSD – still locked in a downward trend

Despite a clear shift in the expectations from the Fed, EURUSD remains in a downward trend that can be encompassed by a wedge formation. The reason behind this is weakness of the European economy that forced the ECB to abandon any hopes of interest rate increases and actually propose the new round of TLTRO. We can see that previous attempts to move higher have failed and the pair would really need a strong impulse to move. Other than the wedge, the pair faces a clear resistance line at 1.1515.