The Federal Reserve is expected to raise the interest rate by 25 basis points during the upcoming meeting on Wednesday, at 20:00 GMT+2. As inflation keeps surging, this will be the first small attempt to curb it. What does it mean for the US dollar? Let’s find out.
What Led To Rate Hikes
The rise of inflation is undoubtedly a huge problem for the United States right now. The annual inflation rate reached 7.9% in February 2022, the highest level since January 1982. At the same time, the economy is expanding at an ultra-fast pace. For example, the US unemployment rate dropped to 3.8% – a new post-pandemic low. Another factor that triggers Fed to act sooner rather than later is the Russia-Ukraine military conflict. The US sanctions against Russia and the ban of Russia’s oil export boosted commodity prices and left no doubt about upcoming rate hikes.
How Many Rate Hikes to Expect
In addition to the Fed Interest Rate Decision, the regulator will release a so-called dot-plot. This is a report, where the Fed members post their expectations of rate hikes. The economists surveyed by Bloomberg see 5 rate increases with the rate reaching 1.25% this year. However, some analysts see an even more hawkish Fed with seven interest rate changes.
The US dollar will likely react to the actual data in these projections. If the Fed turns out to be more hawkish than the market expects it to be (with more than seven rate hikes or half-point rate hike) the USD will soar.
The USD ahead of the Event
If you look at the chart of the US Dollar Index, which tracks the performance of the American currency, you can notice that the decision has already been priced into the market. As a result, the USD has reached the 99.40 level. Thus we can expect a sharp reversal after the meeting unless the Fed surprises. In that case, the US Dollar index can plunge to 98 and even lower to 96.50. Keep in mind that the Federal Reserve may express cautiousness amid the ongoing tensions in Eastern Europe and the possible slowdown of economic growth.
EURUSD has been trading within a symmetrical triangle. That is, after a downtrend, we may see a continuation of the downtrend and reach the support levels at 1.0900 and 1.0850. However, if the Fed fails to surprise the market, the upside momentum to the resistance of 1.1100 (50-period MA) on H4 will be in focus.
