Today is Wednesday and finally, the event we’ve been waiting for the past couple of months is here: the Federal Reserve meeting on monetary policy and Fed’s predictions for the path of future rate hikes. Will the numbers of rate hikes increase? Analysts at ADS Securities shared their viewpoint in this US Dollar Trading Outlook ahead of FOMC Meeting.
21 March, ADS Securities – We know that the Fed will raise interest rates today and this move is fully priced in the market with the Dollar extending its gains during the first 48 hours of the week. Speculation however around the number of rate increases that will follow today’s decision is the key debate.
US Dollar Trading Outlook ahead of FOMC Meeting
Clearly, Dollar bulls are preparing for a hawkish tone coming from Fed’s Chairman Jerome Powell during what will be his first FOMC meeting and press conference as the head of the US central bank.
We believe that this is also priced in as the greenback is seeing strong demand. The intriguing question though is whether investors have gone too far and bought the Dollar too aggressively in expectation for the Fed to signal 3 more rate hikes after today’s move.
Attempting to assess what the Fed will hint on today we need to take a look at the progress of the economy but also understand how central banks attempt to conduct monetary policy while maintaining price stability. The US economy has seen good progress in recent weeks that justifies today’s hike but over the past month, we’ve seen inflation slowing down and wage growth losing steam.
These are the two key drivers for monetary tightening and given the recent retreat there’s scope for the Fed to avoid telegraphing that they see 3 more moves by the end of the year.
Fed will not signal 4 but 3 hikes
Furthermore, it wouldn’t make much sense for the US central bank to put themselves on a set course of 4 moves during 2018 especially so early in the year. This would not allow them to adjust course if the domestic economy slows down or if President Trump’s protectionist policies take a toll on progress and stability.
It is our assessment that the takeaway from today’s event will be a positive message but not to the extent that Dollar bulls are hoping for as the Fed will not signal 4 hikes for this year but stick to their current path of 3 moves.
Should we prove to be correct, the Dollar will sell off during and after the FOMC press conference. However, we believe that the decline will be at a moderate pace as the overall tone will be positive and the retreat will be driven by investors and short-term speculators taking some excessive exposure off the table. We’re looking for the Dollar/Yen to move back below 106 and towards the 105.50 support, the Euro to rally above 1.23 and Pound to edge towards the 1.41 mark once more.
During the European session though the focus will be on the British Pound ahead of the UK labor market data report scheduled for 1.30pm GMT +4. Expectations are set for a steady printing across all components but traders will be keen to see how the Average Hourly Earnings data prints.
Wage growth is linked with inflation and if today’s earnings’ figures edge higher the Pound will receive fresh support after yesterday’s correction and set a positive tone before the key event of the day in the evening. The Pound has strong fundamental support and we expect it to remain firmly above 1.40 unless the Fed surprises us with a very hawkish message.
Equities in Asia are trading above water with investors keeping their focus fixed on the FOMC event. The European and US futures are trending marginally higher – with the exception of the FTSE 100 – and we expect this positive tone to extend towards the London opening and beyond.
We believe that this is an indication that equity traders are looking for a positive but not excessively hawkish bias from the Fed that will not alter current expectations for 3 hikes in total this year.
A steady path from the US central bank will be positive for stocks as investors will be relieved that a more hawkish tilt had been avoided. Finally, Gold has bounced from its $1,310 support and it’s hovering around the $1,315 area – a potential retreat for the Dollar today on the back of the Fed event will allow the yellow metal to re-test the $1,320 resistance.
ADS Securities Risk Disclaimer
This article was provided by analysts of ADS Securities.
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