Fed meeting preview: The magic show of interest rates, inflation, and growth

The Federal Reserve meeting this week is a highly anticipated spectacle, similar to a magic show with a renowned magician who has the power to make interest rates, inflation, and economic growth disappear or reappear with a wave of a wand.

Interest Rates

The current expectations are for the Fed to raise interest rates by 25bps to the 4.50-4.75% range. While this meeting’s interest rate decision is as close to a “done deal” as we ever see with central banks, any hints about how Powell and Company see interest rates evolving in the March meeting and beyond will still move the market.

Source: CME FedWatch

Inflation

The magician's challenge will be to balance inflationary pressure with economic growth. Inflation has been falling recently, but some at the Fed still believe there’s a risk that price pressures become entrenched in a reinforcing cycle. The Fed has maintained a target inflation rate of 2% and provide an update on the current inflationary trend in its statement; for its part, the market will be keen to see if the Fed starts to relax its hawkish rhetoric around inflation.

Economic Growth

Economic growth remains a key concern for the Fed, as the US and global economy show signs of slowing amidst higher interest rates. The Fed's recent statement indicated that economic activity has moderated, with the pace of job gains slowing and consumer spending plateauing. The Fed will need to assess whether the current pace of growth is sustainable and if additional support is required.

Chart to watch: EUR/USD

The world’s most widely-traded currency pair has been trending consistently higher (showing weakness in the US dollar relative to the euro) since bottoming in late September. As the chart below shows, the uptrend remains healthy, with prices consolidating near the yearly highs, the daily RSI locked firmly in a bullish zone, and a recent “golden cross” of the 50-day EMA above the 200-day EMA all supporting prices.

Unless we see a truly shocking development, traders will likely continue to buy dips in EUR/USD, with potential for the pair to break out to a new 10-month high above 1.0940 if the Fed is relatively dovish compared to the ECB.

Source: TradingView, StoneX

The Big Question

The big question on everyone's mind is, will Fed Chairman Powell be able to pull off another successful performance? The market is watching with bated breath, as the outcome of this meeting could set the tone for the rest of the year. Will the magician deliver another outstanding performance and leave the audience in awe, or will he drop the ball and cause market turbulence?

How to trade with City Index

You can trade with City Index by following these four easy steps:

Open an account, or log in if you’re already a customer

• Open an account in the UK
• Open an account in Australia
• Open an account in Singapore
Search for the market you want to trade in our award-winning platform
Choose your position and size, and your stop and limit levels
Place the trade

From time to time, StoneX Financial Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.

As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.

City Index is a trading name of StoneX Financial Pty Ltd.

The material provided herein is general in nature and does not take into account your objectives, financial situation or needs.

While every care has been taken in preparing this material, we do not provide any representation or warranty (express or implied) with respect to its completeness or accuracy. This is not an invitation or an offer to invest nor is it a recommendation to buy or sell investments.

StoneX recommends you to seek independent financial and legal advice before making any financial investment decision. Trading CFDs and FX on margin carries a higher level of risk, and may not be suitable for all investors. The possibility exists that you could lose more than your initial investment further CFD investors do not own or have any rights to the underlying assets.

It is important you consider our Financial Services Guide and Product Disclosure Statement (PDS) available at www.cityindex.com/en-au/terms-and-policies/, before deciding to acquire or hold our products. As a part of our market risk management, we may take the opposite side of your trade. Our Target Market Determination (TMD) is also available at www.cityindex.com/en-au/terms-and-policies/.

StoneX Financial Pty Ltd, Suite 28.01, 264 George Street, Sydney, NSW 2000 (ACN 141 774 727, AFSL 345646) is the CFD issuer and our products are traded off exchange.