Fed Rate Decision Preview

Markets are heading into the Fed's policy decision lacking a key bit of data that could be determinant about where monetary policy is headed.

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What the projections say

There still isn't a solid consensus about what the Fed will do at the conclusion of its 2-day meeting tomorrow. 75% of economists are projecting a 75bps hike, according to CME's FedWatch tool, with the remainder betting on a 100bps hike. But Fed officials have in the past said that 100bps would be very unlikely, and expressed concern about how the market would interpret it.

The other factor is the shifting expectations for rate hikes. The current yield curve suggests that the Fed will stop its current rate hiking cycle by the end of the year. More attention is turning to the Jackson Hole Symposium as a potential inflection point.

Why the change in sentiment?

The most consequential data might be the release of GDP figures the day after the Fed meets, on Thursday. There's plenty of speculation that the Fed already has the GDP data, and will make a decision accordingly. It is believed that growth rates will show a second consecutive quarter of negative growth.

The question is whether that means the Fed will double down on getting inflation under control, or will the Fed hold back to better support the economy. Inflation and the corresponding demand destruction is seen as contributing to the recession, making Powell's conference all more important. In particular, focus will be around where a "neutral rate" might be, since that will provide some guidance for how many more rate hikes might be coming. And whether a pause can be expected in September.

EUR/USD at critical point

Spot EUR/USD ended last week on a positive footing after printing a ‘hammer’ -potentially reversal- candlestick. Following the multiyear drop to $0.9952 bulls regained control, pushing prices to a close above $1.0200 with the support of the RSI showing divergence. The engulfing event adds some upward bias in the short-term, however, $1.0350 is a major cluster resistance.

Should the resistance succumb to bulls, $1.0637 and $1.0775 can be next, but before there, the 20-week average of $1.05870 will be a major level. On the flip side, last week’s low of $1.0073 is near-term support before the swing multiyear low. Below there, 0.9500 and 0.9000, with the round levels in the interim, could be reached.

Source: Spreadex trading platform

Key takeaways

The Fed is going to raise rates on Wednesday but how aggressively is still up in the air despite most betting on a less aggressive 75bps hike. More attention is turning to the Jackson Hole Symposium as a potential inflection point, as the current yield curve suggests that the Fed will stop its current rate hiking cycle by the end of the year.

Closer to the event, will see the release of GDP figures on Thursday. It is believed that growth rates will show a second consecutive quarter of negative growth. The question is whether this means the Fed will double down on getting inflation under control, or hold back to support the economy better.