The latest Federal Rate monetary policy decision at 18:00 GMT should see the central bank raise by a further 75 basis points in an attempt to curb rampant US price pressures. But it is the press conference held 30 minutes later that may give the markets a clue to chair Powell’s thinking for the weeks and months ahead.

The latest CME FedWatch Tool is showing an 88% chance of the Fed hiking rates by 75 basis points tonight, a move that would take the Fed Funds target rate to 375-400 basis points. This rate hike, the fourth 75bp increase in a row, would see US borrowing costs back at levels last seen in 2008. This hike however is pretty much fully priced-in, leaving the 18:30 GMT press conference the real driver of future us dollar price action. A vague notion that the Fed may start reducing the size of future rate hikes, and/or the speed of them has driven the recent risk-on rally seen across a range of asset markets. Yet the recent US economic data releases do not support this dovishness, leaving risk markets vulnerable to a downturn if Fed chair Powell’s rhetoric borders on the hawkish.

The interest-rate sensitive US 2-year is back above 4.50%, a signal that the recent sell-off in the US dollar may soon be ending. The greenback has enjoyed a stellar run over the last year, bolstered by an ongoing series of US rate increases. This underpinning is unlikely to be reversed for many months, leaving the US dollar an attractive yield play against a wide range of currencies.
 

US Treasury 2-Year Yield

(Click on image to enlarge)

Chart via TradingView

The daily USD chart shows the greenback subdued going into tonight’s meeting with the recent support zone holding firm, while the gentle downward slope from the late-September high is keeping any move higher in check. The outlook is slightly muddied by the DXY now sitting in between the 20- and 50-day moving averages. Tonight’s outcome should give the US dollar some much-needed clarity.
 

US Dollar Currency Index Daily Price Chart

(Click on image to enlarge)

What is your view on the US Dollar – bullish or bearish?

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