All Eyes on the Fed

All Eyes on the Fed – It’s finally here – the big day has arrived. Everyone is eagerly awaiting the Federal Reserve meeting later today, which is likely to have a significant impact on the markets, regardless of the meeting’s outcome. However, there are a few important things that traders need to keep in mind, and we will explain them in today’s article.

The Federal Reserve is expected to start cutting interest rates today. However, the size of the first rate cut is yet to be determined. The Fed Fund Futures are pricing 100% chance of a 25bps rate cut and over 65% of a 50bps rate cut in today’s meeting.

Forecasters expect the Federal Open Market Committee to decrease rates by a quarter point to a range of 5% to 5.25%. However, economists at JPMorgan Chase & Co. anticipate a half-point reduction. Investors believe there is a good chance of a half-point adjustment. The central bank’s release of quarterly projections after its two-day policy meeting will provide more insight into future borrowing costs and the economy.

Investors are predicting more aggressive rate reductions this year compared to the series of quarter-point cuts expected by economists. Financial markets have priced in over a full percentage point of cuts before the year ends, indicating at least one half-point reduction.

Dot Plot & Economic Projections

The Federal Reserve publishes the Summary of Economic Projections every quarter, which includes forecasts for the federal funds rate, unemployment, economic growth, and inflation.

This week’s release will cover projections for 2024 through 2027 and is expected to present a range of views on the path of interest rates for the current year.

Some participants suggested lowering interest rates at the July FOMC meeting due to rising unemployment and slowing inflation, and the labor market has since deteriorated further.

However, consumer prices, excluding food and energy, unexpectedly increased in August, supporting a more cautious approach. While the median projection may indicate three quarter-point rate cuts this year, some officials may advocate for a faster reduction in rates.

The Fed’s Strategy is Crucial.

The Federal Reserve’s decision is a very sensitive and complex matter. A 25bps rate cut might send a wrong message, causing investors to fear that the Fed’s action indicates an impending recession. On the other hand, a 50bps rate cut could also send a negative signal, suggesting that the Fed was late in taking action. Therefore, traders should avoid jumping to conclusions. In any case, the Fed’s next strategy will provide investors with more clues. It is crucial to keep an eye on the Fed Funds Futures after the decision, as it will provide more insight into what the markets are pricing in for the future.

DXY Remains Above Support

The US Dollar Index bounced off its support at 100.60 and retested 101.0. However, technical indicators remain bearish on most timeframes. If the support at 100.60 is broken, it may pave the way for further declines, possibly towards 100.00 and then 99.30.

Today’s decision by the Federal Reserve may not necessarily mark the beginning of a significant weakness in the US Dollar, especially given that the market has been pricing in over a 100 basis point rate cut since the beginning of the year. Therefore, the outcome will depend on what the Fed does after the first rate cut.

Prepared by Nour Hammoury, Chief Market Analyst at SquaredFinancial
Nour is an investor, independent market strategist, and financial advisor. He holds a BA in Finance and Banking Science from Al-Ahliyya Amman University and a CFTe in Economics from the International Federation of Technical Analysts. He has more than 15 years of experience in forex, stocks, and global economic developments, as well as central bank policies and intermarket analysis. He appears regularly on major international TV networks, such as BBC, Al-Jazeera, Al Hurra, CNBC, and Bloomberg, holding open discussions and sharing insights and readings of the markets and trends.

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