The market keenly awaits Wednesday’s US Federal Reserve announcements, which are expected to include an initial rate hike within a major cycle of tightening monetary policy.
March 2022 Federal Funds Rate, Forward Guidance, and Projections
Wednesday 16th March 2022 will see important FOMC announcements from the US Federal Reserve. The FOMC is widely expected to announce this day a 0.25% rate hike, the first for several years, and a significant increase from the historically low current rate of 0.25%. Market analysts are strongly expecting a rate hike, and the consensus seems to be that there is approximately an 80% chance that it will be a hike of 0.25%. There is a small chance that the hike will be double that size, at 0.50%, although following the Russian invasion of Ukraine this is seen as less likely to happen.
It is important to note that the market is expecting rate hikes by July 2022 totalling 1.00%, so Wednesday’s hike is just the start. Even if it is a 0.50% rate hike, there will almost certainly be two more hikes before the third quarter.
Another important part of Wednesday’s release may be more details about the ongoing shrinkage of the Federal Reserve’s balance sheet. When this is speeded up, it is seen as a hawkish tilt, and Fed Chair Powell recently hinted that some fresh information about the Fed’s plans here will be released this Wednesday.
Finally, watch the “dot plot” projections of expected rate hikes. The consensus currently sits at a further 0.75% of hikes over 2022, with a dovish minority expecting only 0.50%. If the consensus shifts higher, that will be another hawkish tilt.
What Does This Mean for Traders?
The US Dollar usually dominates the Forex market, and that is certainly the case today. The greenback is the strongest of all major currencies, and closed Friday at a 5-year high price against the Japanese Yen. The US Dollar is strong for two reasons: firstly, because a regime of rate hikes is expected to begin, and we have had a few hawkish surprises here in recent months; secondly, the Dollar has been boosted as a safe haven during the current period of geopolitical crisis resulting from the Russian invasion of Ukraine. It is also worth noting that US inflation is now rising at an annualized rate of 7.9%, a 40-year high, and will likely be even higher next month when the impact of recent commodity price rises begins to filter through into the latest CPI data. This is likely to further reinforce the case for more hawkish policy action from the Fed.
The bottom line here is that we are now in an exciting time to trade Forex, with long USD trades looking likely to have a good prospect of success against weaker currencies such as the Japanese Yen and British Pound. The relative value of the Dollar is likely to be affected by Wednesday’s FOMC release which could contain a hawkish surprise, which would be likely to make the strong bullish trend in the US Dollar accelerate even more quickly, giving even more potential profit on the long side.