Market alert: what to expect from the Fed meeting today?

The FOMC decision is by far the most anticipated market event this week. Investors are sure that we will see another interest rate cut. That’s already priced in. Market reaction will depend on other things. In this analysis we highlight the key things to watch and analyse US500 and EURUSD charts.
 

1. Will the Fed suggest a pause?

We think that the Fed cuts rates because it’s worried about recession risks but Jerome Powell denies it. He called that easing a “mid-cycle adjustment” but how big this adjustment could be? If Powell wants to stick to his rhetoric the FOMC should change the statement to suggest at least a pause in rate cuts.

Sometimes a small change in wording of the statement can have massive implications and you should watch out for this phrase: will act as appropriate to sustain the expansion. This was seen as a “promise” to deliver more rate cuts and withdrawing it could have major consequences. Equity indices wouldn’t be impressed while the dollar could welcome such change.

Withdrawing a promise to act would be the biggest mover of today’s meeting. Source: federalreserve.gov

If the Fed is concerned to make this wording change be sure that Powell will be asked about it during the conference. It is quite possible that the statement remains broadly unchanged but Powell still suggests a pause in easing cycle during the press conference. Remember that the decision will be announced at 6pm GMT and conference will begin 30 minutes later.

2. Were there more votes against the cut?

We are assuming that the interest rate cut is a “done deal” but not everyone at the FOMC is the fan of more easing. Many “hawks” do not have voting right in 2019 so we assume that there will be again only 2 votes against the cut. If there is another dissenter, a longer pause in rate cuts would be more likely with similar consequences as highlighted in the paragraph above.

Another vote against the rate cuts could make markets nervous. Source: federalreserve.gov

3. Is this QE4 or not?

While today’s meeting is mostly about interest rates markets are also focusing on the balance sheet operations that have intensified as of late. The Fed maintains that this is purely technical and should not be seen as monetary expansion but not everyone is convinced. Powell will be asked about this during press conference and should he point out at some balance sheet target numbers it could be seen as a dovish tilt.

The Fed has started injecting large sums into the market – one of the reasons of the recent USD weakness. Source: Bloomberg, XTB Research.

Technical Analysis:

US500

Once again US500 is at the all-time highs ahead of the FOMC decision. On the previous two occasion the Fed wasn’t able to sustain the rally even though it delivered rate cuts AND promised more cuts. One needs to wonder how will the market react if the Fed cuts BUT signals a pause in easing… The nearest support is at 2960. (Source: xStation5)

EURUSD

EURUSD has rallied significantly as of late on the back of FOMC liquidity injections and Brexit-related hopes. However, do notice that the market has fully respected the overbalance pattern and from that perspective the pair remains in a downward trend. Levels to watch today are: 1.1075 (support) and 1.1180 (resistance). (Source: xStation5)