US Dollar Outlook into FOMC on March 16
When the Fed raised the rate last year, the minutes suggest that they were relatively hawkish and expected 4 more rate hikes in 2016, as December Fed's dot plot shows. Subsequent events after the December meeting however have seen oil, commodities, and indices selling off sharply, giving pressure to the headline inflation rate.
Central banks around the world have responded by loosening their monetary policy further. Last week ECB expanded the asset purchase to €80 billion / month and cut the deposit rate further to -0.4%. Earlier in the year, BOJ has also stunned the market by cutting the deposit rate to - 0.1%. During this normalization period, the Fed is likely to stay put today. According to CME interest rate futures market, the probability of a rate hike in today's FOMC meeting is less than 5%, suggesting that investors expect the Fed to keep the same rate.
A more interesting thing to look at today's meeting is the Fed's forward guidance and also the new dot plot. There's a possibility that the Fed may tone down their hawkish outlook to calm down market participants and lower the forecast for the median federal funds rate. If this happens, it may trigger U.S. Dollar selloff as market is pricing a more gradual rate hike. The Fed likely would defer the interest rate hike to June or later in the year, and may opt to hike at a slower rate. The interest rate futures market as of March 16 is pricing in an 82% probability of at least one rate hike in 2016.
Technically, USD Index is trading in the bearish channel from last December. The Index is retesting the top of the channel on March 10 and got a strong rejection lower, which may reflect downside pressure.
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