Can Powell Meet The Market’s Hawkish Expectations?

Today is the Federal Reserve’s rate decision day and market participants expect the Fed to unveil a quicker tapering of bond purchases that paves the way for interest rate hikes next year. We will remain cautious going into the FOMC announcement at 19:00 UTC tonight.

Expectations are very high and so is the risk for disappointment. The market currently expects the Fed to raise rates next year three times with a 61.5 percent probability of at least three hikes. There is even a 31.8 percent probability of four rate hikes in 2022.

The broad-based U.S. dollar strength remained in-play until today as the market discounted the Fed’s hawkish approach but can the Fed live up to the market’s high expectations? Maybe not as the omicron variant created a bit of concern for economic trends and should the Fed share this concern at today’s press conference, investors could give up on dollar long positions. In terms of rate hike expectations, traders will want to see at least two rate hikes next year via the dot plot matrix to remain dollar bullish.

Anything is possible today and traders are well advised to maintain a cautious approach going into today’s policy decision.


EUR/USD: Below 1.1220, euro-bears could send the pair for another test of 1.12/1.1185. If 1.1180 breaks, bearish momentum could accelerate toward 1.11 and maybe even 1.10 but for such a strong dollar move we would need a hawkish shift from the Fed. In case of a disappointment, we could see a short-squeeze with a test of the resistance zones at 1.1320-40 and 1.14.

GBP/USD: Holding above 1.3120 and 1.31 could pave the way for a reversal toward 1.35 and maybe even 1.37. The Bank of England is expected to hike next and if the dollar’s strength fades, sterling bulls may take the opportunity to push the cable higher.


Disclaimer: All trading ideas and expressions of opinion made in the articles are the personal opinion and assumption of MaiMarFX traders. They are not meant to be a solicitation or recommendation to buy or sell a specific financial instrument.

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