Fed lookahead

In a week of central bank meetings the Fed, as usual, takes centre stage.

Federal Reserve
Source: Bloomberg

The bank is not expected to make any changes to policy, but of vital importance will be its view on the US economy and how this will affect the path of rate increases.

It is fairly safe to say that most investors would be rather surprised if the Federal Reserve increased rates at its March meeting. January saw the FOMC stick to a cautious view of the overall situation, even with a December NFP figure that appeared to indicate positive developments in US jobs and wages.

Inflation may have started to pick up gradually, with year-on-year core CPI at 2.2% in its most recent reading, but the threat of deflation has not gone away; CPI measures around the world remain worryingly sluggish.

Investors should keep an eye on the ‘dot plots’, which show current thinking of each member on interest rates for each year. Currently most FOMC members think that rates will be in the 1% - 1.5% range by the end of the year, with only one member going for a rate of 2%.

Rising oil prices will have made inflation calculations slightly better than was the case a month ago. However, with prices of WTI and Brent moving lower heading into the meeting, and Iran declaring that it will not take part in production freezes until its output hits a planned 4 million barrels per day, the rally looks much less assured. The Fed runs a risk of appearing too hawkish should oil prices rollover and take inflation with them.

As for markets, we are looking at a breakout for the S&P 500 above 2000 that is, so far, holding up well. The next target may well be the 2080 area that was last seen at the end of December.

For EUR/USD, traders are still looking for a breakout from the current $1.1050/$1.12 range that has prevailed since the ECB meeting. Finally, WTI needs to regain the rising trend that began in mid-February, lest it risk a move back in the direction of $34.40.

This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.

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