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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 71% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 71% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.

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What will the Fed do next?

As the latest FOMC meeting looms, we look at the current state of play in US economic data, and examine the current breakout in the dollar index.

Chris Beauchamp

Chris Beauchamp
Chief Market Analyst, London

Publication date : 2018-04-30T13:20:56+0100

Federal Reserve
Source: Bloomberg

This week’s Federal Reserve (Fed) meeting is not expected to be a blockbuster, but it will shed further light on a central bank that continues with gradual tightening even as it sends a clear message that above-target inflation remains acceptable.

Fed Funds Futures currently suggest a 47.6% chance of four rate hikes this year. We’ve already had one, so at present three more would carry the interest rate to 2.5%. US growth was 2.3% for the first quarter (Q1) according to initial reports, and while this is slightly weaker, it remains above the trend. As a result, the Federal Open Market Committee (FOMC) can stick to its optimistic view of the situation overall. Core inflation has strengthened as well, breaking above the 2% level for the first time since early 2017.

Federal Reserve meeting

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There are two factors that will continue to bother the FOMC. One is the possibility of a strong move higher in inflation thanks to the tax cut plans enacted by the White House. Jerome Powell’s predecessor, Janet Yellen, was already sounding a warning on the merits of engaging in more accommodative fiscal policy even as the economy improved - ‘counter-cyclical’ policies as they are known - and the continued increase in the Federal budget deficit will also concern other Fed members.

The other big unknown is the impact of trade wars. This poses the biggest risk to economic growth, since a full-blown trade war would make itself felt in consumer spending, employment figures and wage data. For now, the situation has calmed, but there are still plenty of elements that need resolving.

Despite a trimming of short positions over the past few weeks, the overall market remains significantly net short on the US dollar (USD). The latest bounce has a whiff of short-covering about it, but with the overall market still around $20 billion short of the greenback, the rebound in the price may be brief.

Last week saw the US dollar index break the downtrend line that has held since the end of December 2016. If this marks the beginning of a significant move then we would look to $91.93 and $92.75 as near-term targets, with the 2017 peak at $94.93 above this. A push back below the trendline would need a close back below $90.81, and then target $89.71 and $88.12.

US dollar index

US dollar index

US dollar index

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This information has been prepared by IG, a trading name of IG Markets Limited and IG Markets South Africa 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. International accounts are offered by IG Markets Limited in the UK (FCA Number 195355), a juristic representative of IG Markets South Africa Limited (FSP No 41393). South African residents are required to obtain the necessary tax clearance certificates in line with their foreign investment allowance and may not use credit or debit cards to fund their international account.

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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 71% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money. Clients can lose more than they deposit. All trading involves risk.

IG is a trading name of IG Markets Ltd and IG Markets South Africa Limited. International accounts are offered by IG Markets Limited in the UK (FCA Number 195355), a juristic representative of IG Markets South Africa Limited (FSP No 41393). South African residents are required to obtain the necessary tax clearance certificates in order to utilise their foreign investment allowance should the South African resident wish to open an offshore account with IG Markets Limited.

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