EUR/USD: Many expect Fed to turn dovish today. Unchanged outlook could strengthen USD
Macroeconomic overview: The dollar steadied on Wednesday ahead of a Federal Reserve decision. We expect that the Committee will raise the range for the fed funds target rate by another 25 bp, to 1.00%-1.25%.
So unless the Fed wants to stun markets, which have completely priced in a 25bp move for this meeting, a rate hike looks like a foregone conclusion. Failing to deliver would not only cause the Fed to further lose credibility, but may also trigger a risk-off move in financial markets, as non-action would give the impression that there are bigger risks out there. This could ultimately tighten financial conditions, notably through lower equities, which is exactly what the Fed is trying to avoid by not raising rates.
The market expects the Fed to signal doubts over how soon it may make its next move. The Fed's preferred measure of underlying inflation has retreated to 1.5% from 1.8% earlier in 2017 and investors are growing increasingly doubtful policymakers will be able to stick to their anticipated pace of tightening of three interest rate rises this year and next. With many investors worried about a dovish outlook, a surprisingly hawkish one could catch some investors off guard.
The bigger question is whether the Committee is adjusting its policy path. We do not think it will. Instead, we expect few changes to the updated Summary of Economic Projections. Most importantly, the updated median interest rate projections (the “dots”) should continue to show another hike for the remainder of 2017 for a total of three during the year, followed by three more in 2018 and another three in 2019. This would bring the fed funds target rate to 3.0% by year-end 2019, which is in line with the Fed’s estimate for the equilibrium rate. The main forecast revision that we see is a further downward adjustment to the jobless rate projections. In March, the Committee’s median forecast looked for the jobless rate to bottom out at 4.5% in 2017 and stabilize there throughout the next two years.
Technical analysis: The EUR/USD volatility has lowered in recent days and the pair is jammed between short-term moving averages. Technical analysis provides no clear buy/sell signal. Today’s FOMC statement will set the direction for the next couple of days.
Source: GrowthAces.com - your daily forex trading strategies newsletter