The 2-day meeting of the US Federal Reserve begins today. Judging by the chaotic movements of the markets, investors are nervous before the announcement on the rate and the final speech of Fed Chairman Jerome Powell on Wednesday. At any moment, there may be a sharp rise or an equally rapid fall.
Market players are 100% confident in raising the rate by 50 bp. There are also those that are laid at 70 bp. What reaction should we expect from the markets on Wednesday and what will they pay attention to the most?
The key moment will be Powell's rhetoric, the markets will test it on how much the degree of hawkishness will be increased. Judging by the growth in the yield of ten-year treasuries, which exceeded 3%, the rate will still be raised by 50 bps. The central bank will probably announce the start of the sale of bonds from the balance sheet. There is an assumption that all this will begin in June.How might Powell behave at the press conference
The head of the Fed may look calm. It is unlikely that this will be feigned, since he has reason to be calm. Now there is no possibility and no need to speak ambiguously or to focus on secondary topics. The economic recovery in the United States is under threat – this is a fact. In the first quarter, GDP sank for the first time since 2020. The decrease was 1.4%, contrary to forecasts of growth of 1%. The decline is caused, among other things, by the growth of the trade deficit. The situation in Ukraine is hitting prices and supply chains.
Powell may well focus his speech on the importance of the economic recovery and make it clear that the Fed will remain flexible. Markets can appreciate this approach and react positively. This is the first scenario.
The second one provides for a kind of force majeure, that is, something in the speech may go wrong or the markets will think that it went wrong. Panic is not excluded, but big unrest is hardly to be expected. Everyone was already scared, and in advance. So even with signs of panic, volatility is unlikely to last long.
About the more hawkish or less hawkish attitude of the Fed. Powell will certainly appear calm before the markets, as noted above. However, some nervousness in the process of speech will not be completely hidden. The situation is still not normal.
Do not expect that the head of the Fed will openly and directly declare the future plans of the central bank. The Fed usually gives out information in portions, so investors will not have to count on too much. The baseline scenario is likely to be very cautious and calm, just like Powell himself.
Portions of information are likely to arrive later, after the central bank meeting during various interviews and speeches by Fed members. Officials will launch hawks if they want, that's when the second wave of increased volatility will begin.
The dollar continues to grow ahead of the meeting after a slight hitch. According to ING analysts, it is still risky to bet on the formation of a peak for the dollar. The cycle of aggressive tightening is already embedded in the price. Nevertheless, the growth of the indicator is quite possible, after the meeting, the transition of the US currency index to the range of 104-105 is expected.
In this scenario, the next ascending barrier is at the peak of the current year just below 104.00, followed by the level of 105.63, which is the high from December 11, 2002.
The bearish mood in the EUR/USD pair remains unchanged. Neither statistics nor any other factors with a positive bias will help here. The euro extends consolidation around 1.0500, in the future it is not necessary to exclude visiting the low since the beginning of the year at 1.0470. A breakthrough of this level will target the bears at the 2017 low – 1.0340.
