Fed Poised to Hike, but Will It Be the Last?
2023.05.02 03:27
- A 25bps interest rate hike is 90% priced in, with another 25bps hike in June currently seen as 30% likely.
- Assuming the Fed delivers the expected 25bps rate hike, the focus will quickly turn to the statement and Fed Chairman Powell’s press conference for hints about June’s decision.
- The US dollar has fallen vs. the euro so far, but there are signs EUR/USD may be losing its bullish momentum after a failed breakout to 1-year highs.
The Federal Reserve will release the from its May monetary policy meeting on Wednesday, with Fed Chairman Powell’s following.
Fed meeting expectations
According to the CME’s FedWatch tool, Funds futures traders are pricing in a 90% chance that the central bank raises interest rates by 25bps to the 5.00-5.25% range.
Fed Target Rate Probabilities
Source: CME FedWatch
Looking out a bit further, traders see about 30% odds that the central bank will tack on another 25bps rate hike at its mid-June reading. Assuming the Fed delivers the expected increase at this week’s meeting, any changes to the June probabilities will determine whether it’s seen as a “hawkish hike” or a more “dovish hike.”
Fed preview
For Jerome Powell and company, things are going generally alright so far.
A little over a year after the start of the most aggressive interest rate hiking cycle in recent memory, the labor market remains relatively strong, with unemployment holding near multi-decade lows in the mid-3% range and initial unemployment claims only just starting to tick up.
Meanwhile, inflation continues to moderate toward the central bank’s targets, with headline falling below 5% from above 9% last summer and the Fed’s historically-preferred Core PCE measure dipping to 4.60% as we go to press.
Lately, the Fed has pointed to the more esoteric “Core PCE ex-housing” reading as particularly important. As the chart below shows, even that measure of “sticky” inflation is trending consistently lower:
Core PCE Excluding Rent of Shelter
It remains to be seen whether the Fed’s aggressive tightening will have additional deleterious spillover effects – this weekend’s auction of First Republic Bank (NYSE:) to JP Morgan suggests that the stresses in the banking system remain a key concern – but so far, Jerome Powell and company can’t be disappointed with the current macroeconomic trend.
Against that backdrop, it’s unsurprising that the Fed will likely stick to its recent script with another 25bps interest rate hike. Assuming the Fed delivers the expected rate hike, the market will quickly turn its attention to the future; specifically, traders will be keen to determine if (or when) the rate hike cycle will end.
On that front, the central bank will likely avoid pre-committing to any specific path. As The Wall Street Journal’s “Fed Whisperer,” Nick Timiraos, noted earlier today,
“Officials think their communications around future policy actions can be as significant as individual rate changes…[They] are likely to keep their options open… The Fed’s policy statement could be the most important and heavily negotiated step taken by officials this week.“
As always, Fed Chair Powell will take the stage 30 minutes after the release of the central bank’s statement to provide color on the decision and an outlook for the future. In recent meetings, Powell’s press conferences have led to even more volatility than the decisions themselves, so readers should be sure to stay tuned throughout.
Specifically, traders will be looking for insights into the future path of interest rates, Powell’s level of concern with the banking system, and any hints that the Fed is open to cutting interest rates later this year, a possibility that the Chairman has repeatedly downplayed in recent meetings.
US dollar technical analysis: EUR/USD rolling over?
The has seen mixed performance so far this year, underperforming its European rivals while generally outperforming major Asian currencies. Looking at the world’s most widely-traded currency pair, tagged a fresh year-to-date (and 1-year) high near 1.1100 last week, but bulls were unable to hold onto their hard-fought gains, and the pair is now trading back below the early February highs near 1.1030:
Source: StoneX, TradingView
As the chart above shows, EUR/USD was breaking below its near-term bullish channel and formed a clear bearish divergence on its daily RSI indicator at the recent highs. Thursday’s meeting will undoubtedly play a big role in the pair’s price action this week.
But, if the Fed comes off as relatively hawkish (perhaps leaving the door open for another rate hike in June and playing down concerns about the financial system), EUR/USD could see its early-week fall accelerate below 1.0900 and potentially toward the 100-day EMA near 1.0800
On the other hand, a dovish Fed could be the catalyst EUR/USD needs to definitively clear 1.1100 for the first time since last March and set the stage for a continuation of the pair’s recent bullishness.
Original Post
