Sell EURUSD in case Fed maintains tight monetary conditions

20 March 2024 83
Sell EURUSD in case Fed maintains tight monetary conditions

The Federal Reserve will likely avoid signaling an imminent rate cut this week, staying focused on stubborn inflation while keeping one eye on a slowly rising jobless rate.


The Federal Open Market Committee is poised to keep rates in a range of 5.25% to 5.5% at its two-day policy meeting, a two-decade high first reached in July. The rate decision and economic forecasts will be released at 2 p.m. in Washington. Chair Jerome Powell will hold a press conference 30 minutes later.


Fed officials are reluctant to lower borrowing costs until they’re certain inflation is closing in on 2%, the rate they see as appropriate for a healthy economy. But a recent rise in the unemployment rate to a two-year high means they’ll need to balance their attention on both prices and the labor market.


Wall Street will be focused on Fed officials’ forecasts for interest rates — the so-called dot plot — which will show how much the committee expects to cut interest rates in 2024 and 2025.


Most economists surveyed by Bloomberg News expect policymakers to pencil in three cuts for 2024 with the first move in June, in line with markets’ current pricing, though more than a third expect two or fewer. 

Minneapolis Fed President Neel Kashkari, for one, has said he was considering reducing his outlook for 2024 cuts from two to one.


What Bloomberg Economics Says:

“We think the dot plot will show the median FOMC participant still expects 75 basis points of rate cuts this year. Given Powell’s past sensitivity to signs of slowing activity (which is still the case in recent weeks despite high inflation rates) he could surprise on the dovish side at the news conference.”


Some economists, including those at Bloomberg Economics and JPMorgan Chase & Co., predict the FOMC may raise its outlook for the long-run federal funds rate, reflecting persistent price pressures or higher productivity. The committee has estimated that rate at 2.5%, and any increase would imply rates will stay higher for longer in the future.


The description of the labor market will be a key clue to how the committee is weighing job trends. In January, the FOMC said unemployment was “low.” With the February jobless rate at 3.9%, one option would be to reword that to “the unemployment rate has edged higher, but remains low,” according to Bank of America economists.


A plurality of economists expect the Fed to announce a slower pace of tightening in June, with the actual tapering starting in June or July.


Powell, in congressional testimony this month, said the central bank was “not far” from the level of confidence needed on inflation to start lowering rates. That view was more encouraging than most of his colleagues, who have emphasized they’ll be patient in considering any rate cuts. The latest reports on a key gauge of underlying inflation, the so-called core consumer price index, reinforced the case for caution.


In summary, Fed statements sounding a more cautious approach to the start of the easing cycle will lead to a medium-term strengthening of the US dollar and a weakening of EURUSD.


The overall recommendation is to sell EURUSD provided that at the upcoming meeting the Fed will announce in its final minutes that it will maintain a tighter monetary policy framework.


Profit could be taken at the level of 1.0800. Loss could be fixed at 1.0930.

This content is for informational purposes only and is not intended to be investing advice.

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