- EUR / USD has not strayed far from the 1.1900 level so far on Wednesday, amid uncertain pre-FOMC trading conditions.
- The focus of the meeting will be on if, when and how the Fed might respond to a rise in U.S. output.
Unsurprisingly, EUR / USD has seen a very difficult session so far on Wednesday, with market participants keeping their powder dry ahead of Wednesday ‘s FOMC event; the Fed will feature its latest monetary policy decision, new monetary policy statement, updated dot-plots and new economic forecasts at 18:00GMT. As usual, Fed Chairman Jerome Powell will speak at the press conference after the meeting 30 minutes later, or at 18:30 PM. Please note, this is an hour earlier than usual in GMT with the recent clock change in the US. When the UK time changes to BST, Fed events will happen again at 19:00.
In terms of price action so far on the session, price action has been very broad with EUR / USD straying more than around 10 pips from the 1.1900 level and trading flat for the bulk. part of the session. A rise in US government bond yield (10-year yield + 6bps to 1.68%) is matched by an even larger rise in European government bond yield (10-year German + 5bps to above -0.3% , 10-year France + 5bps to -0.03% and Italy 10-year + 7bps to 0.696%), meaning that the change in rate differences has not been as good, meaning very little reading over to FX markets.
There has been very little interesting news related to an economy out of the Euro Zone or the US so far this session and, as such, the whole focus is on the FOMC. Some technical levels of support and aggression to note; to the downside, the March low at 1.1840 is now in full swing with the 200-day moving average EUR / USD – this will be a strong support. To the upside, last week ‘s highs attack is 1.1990 highs (also the March 2 low).
Fed Preview
The FOMC is expected to maintain interest rates at their zero-low band (0.0-0.25%) and the fixed asset purchase rate at $ 120B per month (of which $ 80B is U.S. government bonds).
Fed statement and Fed Chairman Jerome Powell’s comments at the press conference tend to stick to the usual dovish tone; ie without raising rates until the bank has met its renewed double command (ie full earnings and moderate and stable inflation above 2.0%), something the Fed has repeated is still a long way off, and without reducing asset purchases. until further progress is made towards his double command (something Powell also says is a long way off).
The Fed releases new economic forecasts that will be examined more closely than usual; officials have been talking about how they expect inflation to rise in the short term and the updated inflation projections will formalize those expectations. The updated dot-plot is also important; markets have advanced their expectations from the first Fed hike as soon as the end of 2022 / early-2023, despite the old Fed dot plot not predicting any walk-through through to 2024. the new dot plot might expect to walk in 2023 (if that doesn’t exist), that would be dovish).
At the same time, traders will be on the lookout for more information on if, when, and how the Fed might respond to further increases in U.S. government bond yields, as well as recommendations any terms that the Fed may want to see before tapering. asset purchase – more information on the former is more likely than on the latter, as the Fed is likely to want a higher moving average yield.
A number of technical considerations are also worth considering; Bank SLF relief (which means they do not have to hold capital reserves for their financial holdings) is expected to expire this month and the Fed must decide whether to extend this. Failure to do so could lead to market problems as banks rush to meet their new, higher capital requirements. Some desks also think the bank could tweak Surplus Reserve Interest (IOER) tweak, which is a tool the bank uses to keep the level of Federal Assets within its target band – if they do , they insist this is not a tweak. to monetary policy, rather than just technical change to maintain policy.