What to expect from the Federal Reserve rate meeting

Jerome Powell is about to chair his first meeting of the US Federal Reserve’s monetary policy setters, and markets are expecting an interest rate rise.

Jerome Powell, the new US Federal Reserve (Fed) Chair, is this week set to oversee the first interest rate increase of his tenure. A quick look at the CME Group’s Fed Watch Tool suggests that there is a 94.4% probability that there will be a 25 basis point (0.25%) hike in the Fed Funds Rate, pushing the target range of 1.25% to 1.50% to a new range of 1.50% to 1.75%.

Positive economic data leading into the Federal Open Market Committee (FOMC) meeting, combined with new tax reforms pushed through by US President Donald Trump have contributed to a more positive economic outlook for the country, while inflation has moved closer to the year-end target of 2%. All of this is supportive of a short-term rate hike.

While it appears that a rate increase is a foregone conclusion, markets will be looking for clues as to the pace of further monetary tightening this year. It is expected that 2018 will bring three interest rate hikes from the Fed, including this one. However, there is growing speculation that the policy makers on the FOMC may provide more hawkish guidance at the meeting, raising the possibility of four rate increases this year.

A daily graph of the US dollar index shows that the dollar is consolidating as we head into the FOMC meeting. The short-term consolidation highlighted in the blue box shows the index within a range of between 8900 and 9000. This consolidation is expected to continue and extend into the meeting on Wednesday 21 March, as markets are generally cautious ahead of FOMC meeting outcomes. 

For confirmation that the dollar index is resuming an uptrend, we look for a break of the 9000 level, in which case 9060 becomes the initial upside resistance target. This could be catalysed by a more hawkish Fed. Alternatively, a more dovish Fed could see the dollar index moving towards the support of the current range at 8900, a break of which would suggest the resumption of the longer-term downtrend, with 8825 being considered the next level of support. 

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