- EUR/USD has not strayed far from the 1.1900 level so far on Wednesday, amid tentative pre-FOMC trading conditions.
- The focus of the meeting will be on if, when and how the Fed might respond to rising US yields.
EUR/USD has unsurprisingly seen a very subdued session so far this Wednesday, with market participants keeping their powder dry ahead of Wednesday’s FOMC event; the Fed will be unveiling its latest monetary policy decision, new monetary policy statement, updated dot-plots and new economic forecasts at 18:00GMT. As usual, Fed Chair Jerome Powell will be speaking at the post-meeting press conference 30 minutes later, or at 18:30GMT. Note, this is one hour earlier than usual in GMT given the recent clock change in the US. When UK time switches to BST, Fed events will again happen at 19:00.
In terms of the price action so far on the session, price action has been very rangebound with EUR/USD barely straying more than about 10 pips from the 1.1900 level and trading flat for most of the session. A pick up in US government bond yields (10-year yield +6bps to 1.68%) has been matched by an even greater pick up in European government bond yields (German 10-year +5bps to above -0.3%, France 10-year +5bps to -0.03% and Italy 10-year +7bps to 0.696%), meaning the change in rate differentials has not been that great, implying very little read across to FX markets.
There has been very little economic-related news of note out of the Eurozone or US so far this session and, as such, all the focus is on the FOMC. A few technical levels of support and resistance to note; to the downside, the March low at 1.1840 now coincides nicely with EUR/USD’s 200-day moving average – this will be solid support. To the upside, the major level of resistance is last week’s 1.1990 highs (also the 2 March low).
Fed Preview
The FOMC is expected to hold interest rates at their zero-lower band (0.0-0.25%) and the rate of asset purchases steady at $120B per month (of which $80B are US government bonds).
The Fed statement and Fed Chair Jerome Powell’s remarks in the press conference are likely to stick to the usual dovish tone; i.e. no rate hikes until the bank has met its updated dual mandate (i.e. full employment and inflation that is moderately and sustainably above 2.0%), something which the Fed is likely to reiterate is still a long way off, and no tapering of asset purchases until substantial further progress has been made towards its dual mandate (something which Powell is also likely to say is a long way off).
The Fed will be releasing new economic projections which will be more closely scrutinised than usual; officials have been talking about how they expect inflation to pick up in the short-run and the updated inflation forecasts will formalise such expectations. The updated dot-plot is also of note; markets have brought forward their expectations of the first Fed hike as soon as late-2022/early-2023, despite the Fed’s old dot plot not forecasting any hikes through to 2024. Maybe the new dot plot might foresee a hike in 2023 (if not, that would be dovish).
Meanwhile, traders will also be on the lookout for any more information of if, when, and how the Fed might respond to further increases in US government bond yields, as well as any hints as to the conditions the Fed might want to see before tapering asset purchases – more information on the former is more likely than on the latter, as the Fed will likely want to avoid causing yields to move higher.
A few technical factors are also worth considering; bank SLF relief (which means they do not have to hold capital reserves for their treasury holdings) is set to expire this month and the Fed needs to decide whether to extend this. If not, this could cause some market problems as banks rush to meet their new, higher capital requirements. Some desks also think the bank might tweak the Interest of Excess Reserves Rate (IOER), which is a tool the bank uses to keep the Federal Funds rate within its target band – if they do, they will insist that this does not constitute a tweak to monetary policy, rather just a technical adjustment to maintain policy.
Share
