Will The Fed Meet The Market’s Hawkish Expectations?

It was a kind of turnaround-Tuesday with the U.S. dollar edging down after its most recent acceleration. However, it seemed that the market was just taking a breather ahead of today’s Federal Reserve decision. The sentiment could remain constrained until the decision at 18:00 UTC.

The Fed is expected to signal a reduction in stimulus later this year. The focus will also be on the dot plot rate hike forecasts. However, the FOMC announcement could be a tricky one as the Fed moves increasingly closer to scaling back asset purchases amid a deteriorating global economic backdrop where slowing GDP growth estimates in the U.S., relatively high inflation and rising Covid cases are posing a threat.

What is expected today?

Market participants expect a hawkish Fed with a strong hint that the taper will begin before the end of the year following a formal announcement in November.

The hawkish scenario: If the Fed thinks it is time to taper and if the dot plot shows a first rate hike in late 2022 the dollar will rise.

The dovish scenario: If the Fed disappoints the market’s expectations, stating that taper conditions haven’t been met and if Fed Chair Jerome Powell downplays the countdown for a rate liftoff, the dollar will sharply fall.

Most interesting for traders will be the dot-plot forecast due for release at 18:00 UTC and Powell’s press conference at 18:30 UTC.

EUR/USD: If the euro climbs above 1.1765, we expect the pair to test the 1.1770-1.18 price area. A current support zone remains intact between 1.17 and 1.1660. For a bullish breakout we would need a rise above 1.1850 which would shift the sentiment in favor of the bulls.

GBP/USD: The pair still remains oversold while hovering around 1.3650. If the cable falls below 1.3630 and further 1.36, we see a next lower target at 1.3550. On the upside we look at a resistance zone between 1.38 and 1.39.


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