🔽 USD drops in spite of solid US data as investors see potential rate hike pause announcement
Some solid US reports have been released today. ADP report showed an almost-300k increase in US employment, suggesting that US labor market is not slowing down yet, although wage growth is. Moreover, services ISM came in slightly above expectations today, similarly as manufacturing ISM earlier this week. According to market expectations, Fed is most likely to deliver a 25 basis point rate hike today and it also looks likely that it will be the final rate hike in current cycle as there is still a lot of uncertainty around the US economic outlook and issues in US banking sector. First Republic Bank was taken over by JPMorgan but it failed to halt sell-off on other banking shares (Western Alliance or PacWest). Fed has hinted already that banking turmoil led to tightening of credit conditions in the US and further rate hikes could create additional risk for the sector. Of course, jobs market holds firm and inflation stays elevated. Nevertheless, pause in rate hike cycle after today's meeting looks to be the base case scenario. If Fed shows that it is concerned about recession risk, equity markets could be negatively impacted while reaction on US dollar could be mixed. Pause in rate hikes should see US dollar weaken but if recessionary concerns trigger flight-to-safety on the markets, USD could benefit.
FOMC will announce its decision at 7:00 pm BST and Powell's post-meeting press conference will begin at 7:30 pm BST. Attention will be on the wording of the statement as back in 2006 when rate hike cycle was paused, it was a shift in wording that hinted on the pause. Possible omission of phrases that would hint at need of further tightening would strongly hint at such scenario.
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EURUSD is testing 1.1050 area, likely in expectation of rate hike cycle pause in the United States. However, should Fed hint at need for more tightening and suggests that recession risk is on the rise, USD may gain and EURUSD drop. Meanwhile, buyers are attempting to break above recent highs. Source: xStation5
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