Fed rate cut – MaiMarFX

Federal Reserve Chair Jerome Powell was unable to convince markets of no rate cuts this year. As expected, the central bank delivered a 25bp rate hike but what mattered was the outlook after a most probable rate hike pause in June. Powell said that the FOMC does not support rate cuts but the markets didn’t believe the Fed’s comments. Instead, markets have priced in at least 3 rate cuts by December, a completely different forecast.

What is quite worrying is that such a near-term pivot would likely be a reaction to an increasingly worsening economic outlook. The U.S. dollar continued to weaken against the euro and pound.

The further outlook for the dollar remains bearish since there was no hawkish surprise from the Fed which could have lifted the battered greenback.

EUR/USD: The euro flirted with the 1.11-resistance but an upper breakout is still outstanding. The next target is 1.12.

GBP/USD: The pound stabilized above 1.25 and is currently heading towards 1.26. We see a next hurdle around 1.2650 from where sterling may correct.

Today we will have the European Central Bank decision at 12:15 and 12:45 UTC. Markets expect a neutral/hawkish 25bp rate hike by the ECB with the promise of further rate increases in the months ahead provided that inflation remains high.

Thus, the euro’s outlook remains slightly bullish but if the EUR/USD is unable to overcome the 1.1110-barrier it may correct.

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It’s Federal Reserve decision day and the central bank is expected to deliver a 25bp interest rate hike and then signal a pause in its aggressive hiking path. Inflation is expected to cool more meaningful in the months ahead which could allow for the Fed to stop raising rates. However, there is room for a surprise and since the market prematurely speculates on potential rate cuts toward the end of the year, any signs for further tightening would come as a surprise and strengthen the U.S. dollar.

Thus, sustained strong inflation and jobs data could add pressure on the Fed to continue hiking, leaving the greenback’s counterparts exposed to further downside.

The most likely scenario however is that if the Fed officially hits the pause button, the U.S. dollar is likely to weaken, as traders attempt to front-run the next moves, which in this case would be rate cuts. With other key central banks, such as the ECB, still seen hiking borrowing costs a few more times this year, monetary policy divergence is expected to play against the greenback.

The Fed decision is due at 18:00 UTC, followed by the Fed press conference 30 minutes later.

Sideways direction

EUR/USD: The euro recently traded within a sideways range between 1.11 and 1.09. If we see an upper breakout above 1.11, the next target is 1.12. Falling below 1.09 could see further losses towards 1.0750.

GBP/USD: If the pound stabilizes above 1.25, we could see a run for 1.2650. A sustained break below 1.24, however, could lead to a test of the lower support area at 1.23.

Monthly results 2023:

April 2023 (5 days trading only): +38 pips

March 2023: +408 pips

February 2023: +475 pips

January 2023: +123 pips