💲 USD gains ahead of Fed decision

📆 Fed will announce rate decision at 6:00 pm GMT today

Traders are awaiting a policy decision announcement from the Federal Reserve, scheduled for 6:00 pm GMT today. Markets are expecting rates to be left unchanged for the fifth meeting in a row. However, this meeting may shed some more light on the potential timing of the first rate cut. 

Does Fed have more confidence?

Federal Reserve and Fed chair Powell stressed at the last meeting that they did not have enough confidence in inflation returning to target to cut rates. A key question is whether they have more of the confidence now? Data released since the previous meeting does not suggest so. While inflation has indeed slowed in January, it accelerated slightly in February. Earnings growth remained strong. Meanwhile, strong jobs growth continued, although early-year data is often distorted by seasonal adjustments. Summing up, macro situation does not change much from late-January meeting, and it seems unlikely that Fed is now having enough confidence to cut rate tonight. Such a view was often suggested in public speeches made by FOMC members recently.

What happened in data since last FOMC meeting?

• ISM manufacturing Prices Paid subindex increased from 45.2 to 52.9 in January (exp. 46.0). Data for February showed a drop to 52.5 (exp. 53.5)
• ISM non-manufacturing Prices Paid subindex increased from 57.4 to 64.0 in January (exp. 56.5). Data for February showed a drop to 58.6 (exp. 62.0)
• Very strong jobs data for January - NFP at 353k (exp. 187k), average earnings growth accelerated from 4.3 to 4.5% YoY (exp. 4.1% YoY)
• Jobs growth remained solid in February at 275k (exp. 198k), while earnings growth slowed to 4.3% YoY (exp. 4.4% YoY). However, there were large revisions to jobs data for the previous months
• CPI inflation slowed from 3.4 to 3.1% YoY in January (exp. 2.9% YoY), while core CPI stayed unchanged at 3.9% YoY (exp. 3.7% YoY)
• Inflation accelerated slightly in February with headline CPI coming in at 3.2% YoY (exp. 3.1% YoY), while core CPI decelerated from 3.9 to 3.8% YoY (exp. 3.7% YoY)
• University of Michigan 1-year inflation expectations stayed unchanged at 3.0% in March (exp. 3.1%), while 5-year inflation expectations remained at 3.0% (exp. 3.1%)
• Retail sales plunged 0.8% MoM in January (exp. -0.2% MoM), before jumping 0.6% MoM in February (exp. 0.8% MoM)
• Activity indicators released since January FOMC meeting have surprised mostly to the downside

Source: Bloomberg Finance LP, XTB Research

Market does not expect a cut. Not yet

All economists surveyed by Bloomberg expect Fed funds rate to be left unchanged in the 5.25-5.50% range at today's meeting. Money markets also seem to be clear about today's meeting - no change is expected with less than 1% chance of a cut priced in. Currently, money market pricing sees June or July as the meeting when rate cut cycle will begin. Markets see June meeting as a more probable for the first 25 basis point rate cut in the United States, with an almost 70% chance of such a move being priced in by then. Overall, 75 basis points of easing are priced in by the end of this year.

Money markets are currently seeing a 67% chance of the first Fed rate cut being delivered at June meeting. Source: Bloomberg Finance LP, XTB Research

New economic projections in the spotlight

As it is almost certain that rates will be held unchanged today, investors' attention will be on the outlook. However, there may be no surprises either. New set of quarterly economic projections will be released but it is highly likely that the dot-plot will continue to show a median forecast of 75 basis point rate cuts this year, in-line with current market pricing. As we have already explained, there were no major developments in data since the previous meeting, therefore any major changes to the statement or forecasts are rather unlikely. Fed still seems to be more worried about upside risks to the inflation outlook than downside risks, and it is limiting the potential for imminent policy easing. However, should the dot-plot show an upside revision to forecasts, i.e. only 2 rate cuts this year, it would be seen as a big hawkish surprise and may triggered a jump on USD and pullback on indices.

When it comes to Powell's press conference, journalists and traders will focus on whether the first rate cut could come in the first half of the year (June meeting) or will it delayed into the second half of the year (July meeting).

Source: Federalreserve.com

How will markets react?

EURUSD

EURUSD erased half of the upward move launched in mid-February 2024. A recent USD strengthening has push the pair down back to the 1.0840 area, a 2-week lows. USD continues to gain today, and a hawkish surprise from Fed, like dot-plot suggesting only 2 cuts, could help the pair break below 1.0840 support, marked with 50% retracement. In such a scenario, The next support can be found in the 1.0800 area, marked with 61.8% retracement.

Source: xStation5

US100

Nasdaq-100 futures (US100) have been trading largely sideways so far in March. The 18,360 pts area limits upward moves on the index. Index is once again closing in on this zone. A dovish Fed meeting today, hinting at 3 or 4 rate cuts this year, could provide fuel for indices, including US100. In such a scenario, a move to fresh all-time highs cannot be ruled out.

Source: xStation5