The central bank of the largest economy in the world is about to drop the May monetary policy decision!
What can traders expect from the event and how can it affect the price movement of the dollar?
Here’s what you need to know if you plan to trade this central bank announcement:
Focus on the event:
Federal Open Market Committee (FOMC) Monetary Policy Statement
When will it be released:
May 3, Wednesday: 6:00 PM GMT, 7:00 PM London time, 2:00 PM New York, 3:00 AM Tokyo (May 4)
check files Economic calendar Find out when the reports are released in your time zone!
Expectations:
- The Fed raised interest rates by 25 basis points to a range of 5.0% – 5.25%.
- Chair Powell will probably signal a pause in rate hikes, but he’s doing his best to dampen 2023 rate cut speculation.
Since the March decision, closely watched indicators by the Fed have continued to show that inflation remains steady at high levels and labor market activity is far from stagnant.
But the much weaker-than-expected advanced GDP reading last week hurt the risks of monetary tightening as much as the Fed has in the past few months.
The Fed has also been particularly wary of concerns in the banking sector because it has recognized that “Historical recessions related to financial market problems tend to be more severe and lasting than average recessionsBack in March.
So, while the Fed will likely go ahead with another rate hike to take another hit to inflation, expect that it will announce a June pause to reassess the impact of its hawkish moves.
But a halt to a rate hike in June is already widely expected (File CME Fed Monitoring Tool It is currently pricing the probability of a 63.6% fed funds probability in a range of 500-525 basis points). What the markets want to know now are the Fed’s plans for the rest of 2023 and early 2024, and any surprises there are likely to drive up volatility in the short term.
Relevant US data since the last FOMC statement:
Arguments for Tight Monetary Policy / Bullish Dollar
In the week ending April 21, US mortgage applications rose 4.6% despite the 30-year fixed mortgage rising 12 basis points to 6.55% (a one-month high).
Core PCE price index posted a rise of 4.9% qoq (+4.1% qoq) vs. 4.4% qoq.
US CPI for March: +0.1% yoy (+0.3% yoy expected) vs. +0.4% yoy: +5.0% yoy (+5.3% yoy expected); Core CPI rose to +5.6% yoy vs +5.5% yoy expected/previous
The US Employment Cost Index accelerated from 1.0% to 1.2% in the first quarter, marking the first acceleration in a year and the seventh consecutive quarter of or above 1.0%.
US S&P World Manufacturing Index for April: 50.4 vs. 49.2 previously; The services business activity index recorded 53.7, compared to 52.6 previously
🔴 Arguments for easy monetary policy / bearish dollar
Dallas Fed Manufacturing Activity for April: -23.4 (-11.0 expected) vs. -15.7 in March; The Employment Index fell 2.4 points to 8.0. The wage and benefits index rose to 37.6, above the average rate of 21.0
US GDP Q1 2023 Reading: +1.1% QoQ vs +2.6% QoQ
The four-week average of continuing jobless claims rose 10,250 to 1,836,500 in the April 27 statement, the highest level since December 2021.
US Personal Income for March came in at 0.3% m/m as expected and in line with February’s reading. Personal spending was flat at 0.0%m/m in March (expect -0.2%m/m) vs +0.1%m/m prior
Major producer prices in the US fell 0.5% month over month in March while core PPI fell 0.1%. Annual prices fell 2.7% year-on-year, their smallest gain in two years, and supported sluggish prices seen in CPI data this week.
Philly Fed Manufacturing Index – an indicator the Fed cited in its decision – for April: -31.3 (-18.0 expected) vs. -23.2 in March
US Consumer Confidence fell to 101.3 in April (106.0 expected) vs. 104.0 previously.
Previous issues and the impact of the risk environment on the US dollar
March 22, 2023
overlap US dollar pairs1 hour forex chart
Action / Results: As expected, the Fed raised interest rates by 25 basis points to the target range of 4.75% – 5.00%, citing tightening bank lending conditions as one of the reasons for not raising rates.
FOMC members did not change their forecast for the point, but the new forecast showed that they expect higher economic inflation and less gross domestic product And Unemployment rate in 2023 compared to the December forecast.
The Fed raised interest rates by “only” 25 basis points and shifted its tightening bias from “Continuous rate increases would be appropriate“for”Some additional policy validation may be appropriateIt translates to “a peaceful rate hike” during the US session.
Risk Environment and Internal Market Behaviors: Markets were emerging from banking tensions and coordination of central bank actions on Monday. This made it easier to sell the US dollar and buy the “riskier” bets when the markets took a “pessimistic rally” from the Fed event.
The US dollar fell sharply across the board upon the release of the statement, but retained its weakness against safe havens before the end of the day.
February 1, 2023
Action / Results: As expected, the Fed raised its target rate range by 25 basis points to 4.50% to 4.75%. Nor was Chairman Powell, unexpectedly, completely hawkish on the markets. He pointed to the recent “welcome” decline in inflation rates and said it had not affected the labor market… yet.
Risk Environment and Internal Market Behaviors: The less hawkish rhetoric, which traders began pricing in the day before the decision, sent the US dollar lower across the board. Selling the US dollar is likely to drive up the prices of gold, cryptocurrencies, and US stocks.
price movement probabilities
Possibilities of feeling risky: Concerns about the banking sector and slowing global growth make it easy for market players to “sell in May and lay off” this week.
Unless we see risk taking at the beginning of the month, or this week’s PMIs show an improvement in business activities, safe haven demand may limit US dollar losses amid the Fed’s dovish outlook.
US dollar scenarios
Base case: As with the last two decisions of the FOMC, the Fed could do what markets expect and raise interest rates by 25 basis points to a range of 5.00% – 5.25%.
In his press release, Powell likely recognizes the aggravating effect of tougher bank lending conditions, the recession risks they cause, and higher interest rates.
But Powell will also point to continued high inflation and the labor market which remains fine to justify keeping interest rates high for an extended period of time. It will likely reinforce the Fed’s point chart forecast of not raising interest rates until 2024 and possibly hint at further rate hikes if economic data allows.
Confirmation of a less hawkish stance should pull the US dollar against its peers, but if we are in a broad risk-off mood on Wednesday, that could limit any losses for the US dollar should it occur. In the event of a pessimistic FOMC event and broad risk, look for short USD setups against safe havens such as the Japanese Yen, Swiss Franc, and even the Euro.
Alternative scenario: The Fed rate hike has already been decided so USD volatility will likely depend on what markets take away from Powell’s pressure.
If the interest rate announcement and subsequent press conference turns out to be a non-event, other market topics (eg: debt ceiling, banking sector woes, geopolitical concerns) and/or counter currency stories could take center stage driving the USD during the week. the prices.
The US dollar could act as a safe haven if risk aversion persists and potential buying against “riskier” bets such as the AUD, NZD, CAD and GBP is something to look at this week.