The upcoming week will be filled with a number of important events, but the focal point will be the two-day Federal Reserve meeting on monetary policy.
The dynamics of federal funds rate futures say the central bank has a 98% chance of raising the key interest rate by 0.25%, pushing it to 5.50%. Interestingly, such an assumption base solely on firm promises from several Fed members, including its chairman Jerome Powell, to raise rates twice more by 0.25% each before the end of the current year. However, the latest data on consumer inflation and other inflation indicators, such as the Personal Consumption Expenditures (PCE) index, clearly indicate that inflation in the US continues to show a steady decline. According to the latest data, it dropped to 3.0% year-on-year, only 1% higher than the target level of 2%.
This means that the Fed no longer possesses a reason to exert additional pressure on the already declining inflation by raising interest rates, which could worsen the economic situation in the country.
But some investors still believe that the US central bank will raise rates regardless of the circumstances.
In terms of the ICE dollar index, a rise may be expected as other central banks, such as the ECB or the Bank of England, will pause their rate hike cycles due to signals of decreasing inflation. Earlier, both euro and pound rose confidently amid expectations that these banks will have to continue raising interest rates because of high inflation levels.
Going back to the Fed, although the priorities of the bank could change within a month, markets will likely see a continuation of the pause in rate hikes, which will result in a downward reversal in the ICE dollar index. This, in turn, will lead to a rise in other currencies such as euro and pound, since the overall values of consumer inflation in the Eurozone and the UK remain higher than in the US.
Forecasts for today:
EUR/USD
A correction could be seen in the pair ahead of the monetary policy meetings of the Federal Reserve and the European Central Bank. If the former does not raise interest rates while the latter does so, the quote will fall further to 1.1025 and then reverse upwards to 1.1340.
GBP/USD
The pair may decline further to 1.2765 and then, based on the Federal Reserve's decision to pause rate hikes, reverse and surge upwards towards 1.3130.
