A confused Fed could still spring a surprise at this Wednesday’s FOMC
The US Federal Reserve’s hotly anticipated FOMC takes place this Wednesday and though no rate hike is expected, the focus will very much be on the language of the statement, which could be more hawkish following the recovery in stock markets and a strong jobs number for February.
The Fed is still biased towards raising US interest rates, particularly with a strong jobs market, but will be wary of mixed economic data and potential volatility in global financial markets.
The tone of the announcement will likely be one of cautious hawkishness, which should be supportive of USD. If the statement is overly hawkish, it could spark a run on risk / commodity currencies while also giving JPY a boost as risk appetites once again turn to fear.
The Fed is likely to signal the following:
• Will leave Fed funds target rate unchanged at 0.25-0.50%
• Could signal just one or two more rate hikes this year, down from the originally guided four increases, with one potentially in June followed possibly by another in December
• Will likely talk of vigilance over the global economy and volatility in financial markets
• Likely to focus on continued strong growth in jobs creation - though still concerned over lacklustre wage increases
• Recent stabilisation of commodity prices should provide some relief in terms of deflation -- providing prices don't plunge again.
However, whatever the Fed indicates, in terms of its outlook for the economy, inflation and interest rates, it is far from written in stone. Any lunge back into financial markets volatility and some bad economics numbers could quickly sweep away anticipated interest rate rises and even stir talk of rate cuts.
The global economy and financial markets remain fragile and hardly represent an ideal backdrop for tightening US monetary policy. Traders should also look out for any potential ‘stings in the tail’ in the FOMC’s announcement.
For instance, last week the European Central Bank upped its quantitative easing programme and cut rates deeper into negative territory, all bearish for EUR, only to add that it didn’t anticipate further rate cuts into negative territory, which saw the single currency whipsaw back up. Even the strong US Non-Farm Payroll numbers, which should have been USD bullish, turned out to be the opposite due to weak wage growth.
Given the very uncertain environment and with the Fed seemingly as confused about the true state of the global economy as everyone else certainly leaves scope for the FOMC to deliver a surprise.
TECHNICAL ANALYSIS: EUR/USD – Can the uptrend continue?
Despite the best efforts of the European Central Bank, EUR/USD remains on an upward trajectory. It will now be the US Federal Reserve’s turn to bring some volatility to exchange rates this Wednesday.
Following the bout of volatility last week after the ECB’s announcement EUR/USD has been mildly pulling back. Also, the strong buy signal generated by the slow stochastics might be close to running its course and could be close to giving a sell signal.
Support for EUR/USD can be found at 1.1017-20, 1.0959, 1.0868 with resistance pegged around 1.1177, 1.1256, 1.1325 & 1.1376.
By Justin Pugsley, Markets Analyst MahiFX