Our focus will be on the Federal Reserve meeting today with Dollar's outlook hinging on what the US central bank and Chairman Powell have to say in regards to the economy and monetary policy. Fed's dot plot and economic projections will be closely watched for clues while Powell's press conference also demands investors' attention. Meanwhile, the Pound treads water as Theresa May is expected to formally ask for an extension to Article 50 during the EU Council meeting tomorrow. Equities were mixed, with Europe in the green and the US almost flat but Gold and Oil pulled back.
The most important risk event of the week will clearly be today's FOMC meeting and the key takeaway revolves around the Fed's forward guidance. There are three main points of interest today: the Fed's dot plot, their inflation and growth projections and Powell's press conference. Starting with maybe the most important of the three, the dot plot chart is the main way the Federal Reserve policymakers express their expectations in regards to future interest rates. Back in December, the Fed updated their dot plot to project 2 rate hikes in 2019 but this is widely expected to change today.
The Fed will most likely change their expectations to project 1 move in 2019 while the markets are currently pricing in no rate hikes this year, or even a rate cut, as seen on the Fed fund futures. Given market participants' expectations, a reduction from 2 expected hikes to 1 this year will not catch investors' off guard but still the Dollar should respond with an initial move lower. However, the overall manner of the greenback's response will also hinge on the updated economic projections and Powell's comments. In terms of the former, it is likely that the Fed will leave their projections unchanged offsetting a more bearish dot plot, even though we've seen some weakness in recent inflation figures.
So the Dollar's overall price action post-FOMC may ultimately depend on Powell's tone during his speech. Now, Powell has decided to employ a patient and cautious tone during his past appearances and we expect this to remain the case today. Powell has to acknowledge the lingering geopolitical risks, with Brexit and trade talks still ongoing, but whether he conveys a more optimistic message will dictate the price action. We see two scenarios here: i) a bearish dot plot hinting on 1 rate hike this year and a cautious Powell, which will send the Dollar further to the downside or ii) a bearish dot plot but a marginally optimistic Powell, which will offset the Dollar's initial down move and leave the US currency largely unchanged.
Dollar/Yen saw a correction overnight rising to 111.60 while the Euro and the Pound saw mild declines to 1.1350 and 1.3250 respectively. Based on our two scenarios detailed above, a bearish Dollar takeaway from today's Fed meeting will send USD/JPY to 111 and 110.75 in extension while the opposite case will push prices to 112. The Euro traded sideways yesterday but depending on the Fed event we may finally see 1.14 today or some profit-taking taking the shared currency to 1.13. Finally, the Pound held unchanged, still waiting for May to ask for a Brexit delay but depending on the Fed we could see 1.3350 or 1.32 over the course of the day.
Gold hit our $1,310 mark yesterday but immediately reversed course to move to $1,305. The $1,310 ceiling is an important barrier and we wouldn't have expected it to be broken in one go but today may be a different story; an overall bearish Fed takeaway will send Gold to $1,310 again and a potential break will expose the $1,324 area while a more optimistic Powell will push prices to $1,300 and $1,295 in extension. Oil also declined having reached $59.50 but as long as prices hold above $58, a fresh leg towards $60 is still likely.
Finally, equities had a mixed day yesterday with Europe closing in positive territory while the US markets were largely unchanged. This morning though, futures on both sides of the Atlantic are pointing lower as investors are growing nervous regarding the US-China trade talks. Rumors emerged that the Chinese side is pushing back against the US demands, with intellectual property, drug data and patents being the sticking points. As such, following a series of higher highs, stocks may be due a respite. However, given the almost certainly patient Fed approach and a potentially optimistic Powell equities will likely resume their uptrend very soon.
MARKET EVENTS TO WATCH
- UK Consumer Price Index - 1.30pm
- DOE U.S. Crude Oil Inventories - 6.30pm
- FOMC Rate Decision - 10pm
All times are GMT +4.