All eyes will on the US Fed on Wednesday as market participants try to decipher how near a rate hike can be. The dollar index is running back toward 92 ahead of the New York session.
The Fed is expected to keep rates unchanged at the current 0.25%. However, the market is looking into the nearest future as the US economy resurges amid a rising bond yield. The S&P 500 has shed over 250 points in the last 24 hours as a result, while the dollar steadies upwards.
The Fed chair’s speeches in the last weeks have not been enough to calm the markets’ suspicion over the prospects of a stronger growth and a rising yield leading to rate hike. A rising inflation and higher yield could force the bank to reconsider its current monetary stance. However, Powell has continued to reiterate the need to keep the current policy unchanged citing over 9.5 million unemployed Americans as the major reason. Also, the bank is ready to accept an inflation rate exceeding 2%. With all these in mind, it would be interesting to know what the new projections of the bank are. The bank’s focus will be on employment and inflation (price stability). What are the likely scenarios?
The US current inflation rate is around 1.7% which is below the bank’s 2% target. With vaccines spiking up growth rate beyond expectation, the market might be concerned about an inflation rate exceeding the 2% target. However, if the bank continues to downplay inflation which includes accepting to work with a rate slightly above 2%, we might see some pressure on the dollar. On the other hand, the stock market might get a lift and recover from the current dip.
High Unemployment fears
The February employment figures were quite impressive. However, Jerome Powell has come out boldly in recent days to say that the bank is more interested in the broader employment situation. Over 9.5 million Americans are still unemployed with the majority of that figure coming from the minority races. Therefore, the recent figures might not mean much. If the Fed sound dovish in its employment forecast, we might see the equities market under pressure while the dollar surges.
The bank is expected to keep the current rate unchanged. A very unlikely rate hike or clues to a near-term rate hike would hike the dollar price far upside and put bigger pressure on the equities.
DXY technical analysis
The dollar index is confined within the 91.5-92 range. Above 92 is the 92.5 high and to the downside is 91. The dollar should find its way toward one of these intraday extremes if the expected FOMC momentum delivers. From a technical perspective, one can reckon the end of a bullish correction at 92.5. However, the sluggishness of the move cites indecision.
A bearish pennant pattern suggests the current dip might not be over after all. Dovish comments or not-so-hawkish Fed comments could pressurize the dollar. A break below the base of the pennant would suggest a further dip to the 91 psychological level at least. However, if 92 could no longer hold as a result of an overly hawkish Fed, we should see recoveries toward the 92.5 top.
EURUSD technical analysis
EURUSD will definitely bounce on a bearish dollar. The current pair is currently in a bearish correction. If the dip continues below 1.185, we should eventually see a hit of the 1.18 psychological level. A bearish dollar which is more technically appealing should eventually see the pair rise above 1.19 and break above the channel at 1.195. The near-term bullish target is at 1.21 at least.
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