Another rate hike by the Fed is imminent; Pay attention to the points – Action Forex | Jewelry Dukan

We have a very busy week ahead with four central bank meetings on the agenda but the standout one might be the FOMC decision which is scheduled for Wednesday at 18:00 GMT. After last week’s hotter than expected CPIs for August, market participants tabled a full percentage point hike. But will the Fed really step on the brakes this time and how will the outcome affect the dollar?

How did investors get the 100bp bet?

At its last meeting in July, the FOMC announced its second consecutive hike of 75 pbs, but Fed Chair Powell said it may be appropriate to slow the pace of future hikes and painted a picture far from today’s reality was removed. The committee did not meet in August, but investors had a chance to hear the Fed chair again at the Jackson Hole economic symposium. There Powell appeared in his hawk suit and said they would raise interest rates as high as needed and keep them there “for some time.” While acknowledging that it could hurt both economic growth and labor market conditions, he added that these were the “unfortunate costs of reducing inflation,” and many of his peers have since agreed, with Cleveland Fed President Loretta Mester the interest rates added should rise to just over 4%.

All of this encouraged market participants to increase their bets on a more dovish Fed, but icing on the cake was last week’s hotter-than-expected CPI data, which disappointed those who expected inflationary pressures to ease in the coming months would, and allowing others to place bets on a full percentage point raise in this event. According to Fed Funds futures, market participants are now assigning a 20% chance of such action, with the remaining 80% pointing to a 75 basis point rise. This may have increased the risk of disappointment and thus the chances of a pullback in the dollar, even in the still very hawkish case of a third 75 basis point hike.

New “dot plot” to determine dollar belief

However, a turnaround in the dollar’s prevailing uptrend remains highly doubtful. Wednesday’s decision will be accompanied by updated economic forecasts and a new dot plot. Therefore, investor decisions will also largely depend on it. Currently, market participants agree that rates could rise above 4% and expect to peak around 4.4% in March, but disagree with the view that they should stay there for some time. They are pricing in a 25 basis point reduction through September. That’s why a new conspiracy that points to a high near 4.4% but no cuts for the rest of the year – in line with recent comments from many officials – could add fuel to the dollar’s engines and allow it to weather any hike to win back. associated losses.

The euro/dollar could rally slightly higher if the Fed hikes 75 basis points, but a hawkish plot and a scatter chart suggesting no rate cuts next year could allow the bears to trade near the downside line set by the Fed Pulled high from to rejoin the action February 10th or near the 1.0200 zone marked by the September 12th and 13th highs. The downwave could lead to a break below 0.9860, confirming a lower low and taking the pair into territory last tested in 2002. Next support may be found at 0.9615, marked by the lows of 6th August and 17th September this year, a break of which could result in extensions towards the inner swing high of 17th September 2001 around 0.9335.

A break above 1.0370 may be needed for the dollar to enter defensive mode against its European counterpart. The Euro/Dollar would already be above the aforementioned down line while the move would confirm a higher high on the weekly chart. This could encourage the bulls to scale towards the 1.0615 or even 1.0770 barriers marked by the 27th and 9th June highs respectively.

Inflation expectations complement the no-cut narrative

The latter scenario seems the least likely as another factor against rate cuts next year is that inflation expectation indicators, although falling from their recent highs, are still pointing to a rate that is significantly lower There is a year to go above the Fed’s target of 2%. Furthermore, with the Fed assuming an average inflation target for 2020, hitting just 2% may not be enough. Officials could choose to keep inflation there for some time or even push it briefly below target.

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