When is the Fed meeting and how could it affect EUR/USD?

The Federal Reserve is scheduled to announce its interest rate decision and publish the revised Summary of Economic Projections (SEP), the so-called dot plot, this Wednesday, March 22, at 18:00 GMT. This will be followed by the post-meeting FOMC press conference at 18:30 GMT. Investors had begun to re-price the Fed’s policy outlook following last week's collapse of two mid-size US banks – Silicon Valley Bank and Signature Bank. 

That said, investors are still forecasting a 25 bps rate increase amid easing fears over a deepening liquidity crisis following the quick measures taken by the Fed. This, along with a positive development surrounding the Credit Suisse saga, suggests that the Fed could stay focused on battling inflation. Nevertheless, the terminal rate projection in the dot plot and Fed President Jerome Powell’s comments on the policy outlook and the market turmoil will provide fresh clues regarding potential future policy steps.

In December, the Fed’s SEP revealed that the median view of the policy rate at end-2023, the terminal rate, stood at 5.1%, up from 4.6% in September's SEP. At this point, an upward revision to the terminal rate projection shouldn’t be surprising. Having said that, where the terminal rate lands will reveal whether policymakers have turned reluctant to continue with rate hikes. Moreover, market participants will want to know if policymakers forecast a rate cut before the end of the year, given the negative impact of high interest rates on financing conditions. 

According to Yohay Elam, Analyst at FXStreet, “after the initial reaction, the focus will shift to interest rate projections. I expect no significant change for 2023 – the Fed will likely stick to its guns about refusing to slash borrowing costs this year. By signaling rates will near 5.50%, the Fed would continue conveying a message of confidence. It could offer a token reduction of its projections for 2024 and 2025 – but markets do not look that far.”

FOMC Chairman Jerome Powell will have to respond to tough questions on the state of the banking sector. His communication on how the Fed plans to continue to tame inflation while reassuring that SVB turmoil will remain contained will impact the action in US Treasury bond yields and the US Dollar’s performance against its major rivals.

Previewing Powell’s presser, “if fighting inflation is an overriding priority, even if it results in a recession, shares would tumble, and the Greenback would surge. Such a clear-cut message also has low chances,” Elam noted. “I expect Powell to dedicate significant emphasis and time to the labor market – the Fed's second official mandate, alongside price stability., He could tie the bank's next moves to jobs data rather than solely banks vs. inflation.” 

Eren Sengezer, European Session Lead Analyst at FXStreet, shares his outlook for EUR/USD: “Heading into the key central bank event risk, the EUR/USD pair trades with a positive bias comfortably above 1.0700. The Relative Strength Index (RSI) indicator on the daily chart stays near 60, suggesting that the pair has more room on the upside before turning technically overbought.”

“Nevertheless, a hawkish dot plot combined with Powell’s assurance that they will focus on taming inflation should help the US Dollar gather strength and cause the pair to turn south. In that scenario, the 50-day Simple Moving Average (SMA) is likely to act as dynamic support at around 1.0700. A daily close below that level could open the door for an extended slide toward 1.0600 (100-day SMA) and 1.0540 (static level).”

“On the upside, EUR/USD could face interim resistance at 1.0850 (static level) before targeting 1.0900 (psychological level, static level) and 1.1000 (psychological level),” Eren adds further.