US: What To Watch At The March Fed Meeting

And by the way, these issues are linked. By keeping US banks heavily invested in the excess reserves bucket, by extension the effect of an IOER hike, even if just by 5bp (but we think it could be as high as 10bp), would be magnified. That is an advantage to extending the exclusion of deposits at the Fed from the supplementary leverage ratio. The link with Treasuries is also there. The Fed will be happy with the rise in US market rates to date, as it implies a growing market discount that a reflation outcome is dominating the prior deflationary one. But the Fed will also not want to add fuel to this from a technical sense by making an adjustment that provides the bond market with an excuse to potentially overshoot versus fundamentals.

FX reaction - watch Treasuries

The FX market will react to this FOMC meeting through the prism of US Treasuries. Bonds sold off after Powell’s WSJ Q&A, pressuring risk assets and lifting the dollar. If the Fed Chair can present a dovish narrative in such a way that US Treasuries avoid a disorderly sell-off, then those currencies exposed to the global business cycle – including the EUR – can probably enjoy some modest gains later in the week.

That the Fed will one-day hike interest rates need not necessarily undermine risk-sensitive currencies and lift the dollar. That sell-off would probably only occur if genuine concerns arose that the Fed were behind the curve and US real interest rates rose quickly. That seems unlikely. And as further evidence emerges later this year of economies leaving lockdown, expect commodity currencies and those exposed to equity flows (e.g. north Asia) to extend their rallies against the dollar.

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