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Money markets now see very little chance of a rate move later today with a hawkish “skip” forecast by markets.

The FOMC is expected to take time to assess the lagged effects of the most aggressive policy tightening seen in over 40 years.

But with inflationary pressures still elevated and enduring for longer than policymakers would like, the chances of a July rate hike sitting above 70% are still elevated.
 

Yesterday’s US inflation was the last piece in the Fed’s puzzle ahead of the FOMC decision today.

The key core number, which excludes volatile food and energy prices and better reflects the underlying trend, hit expectations but the headline reading came in lower than estimates.

This has seen bets firm up of the Fed standing pat at its meeting this week.

The widely watched core number printed another 0.4% m/m reading for the second straight month which matched the monthly average seen since June last year.
 

Eyes on Fed outlook in July and beyond

The issue for the FOMC is that recent data has given mixed signals about the resilience of the economy.

The labor market remains relatively hot with strong monthly job gains still being underestimated by economists. But wage growth ticked lower and PMI survey data points to darker clouds lurking around the outlook. 

It seems likely that policymakers will continue to lean towards data dependence, so keeping their options open to another rate rise at its late July meeting.

That could be Chair Powell's tone and language at the press conference, while the dot plot could complicate things. (Dot plot = FOMC member's projections for the Fed funds rate.)

The March dots showed that the median FOMC participant expects 75bps of easing in 2024 and that the FOMC has already hit its terminal rate of 5 to 5.25%. But those dots were set during the US banking stress and when the debt ceiling was a forward-looking risk.

If the Fed holds this week and the median projection for the Fed funds rate reinforces that they’ve hit the peak rate with about 75bps of cuts in 2024, then markets could rally on the increased confidence that the next move in rates is down relative to the marginal pricing for another hike.

A more hawkish market outcome would be a higher terminal rate so leaving the door open to signal further tightening followed by a muted easing path which would boost the dollar.

Support on the DXY sits at the 100-day simple moving average (SMA) around 103 and resistance around the 103.6 – 103.7 area which includes the 21-day SMA.

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