The "hawkish pause" strengthened the USD but moderately

The Federal Reserve performs “hawkish pause". Powell calls the movement merely adjusting the pace of interest rate increases, which means that now with high probability we can expect an increase in the cost of money at every second meeting. Median expectations of representatives FOMC indicates that we should get two more moves this year, which means that at the end of 2023 we will see a range of 5,5 - 5,75 percent.

Faster rate cuts?

Yesterday's lack of action does not mean that the end of the hike cycle has been reached. This is evident from Powell's words and from hard data such as the Fed's macro projections and the dot chart. Here, the level of 5,6 percent is indicated. which means that at the end of the year the range for the main interest rate in the US can reach the level of 5,5 - 5,75 percent. In March, the median was 5,1, similar to December 2022.

The market was to some extent prepared for the next one upward movements on the feet, but the new "dot plot" once again created a gap between the rate path expected by the market and the path expected by the FOMC. The market has long since become accustomed to expectations of faster interest rate cuts than US central bankers.

Therefore, yesterday's FOMC decision with certainty was not negative for USD, but it was also not a breakthrough that would justify a complete revaluation of the dollar. Market volatility was moderate. EUR/USD fell by 50 points. which is not unique. In the past, events of this kind (crucial for FX market) caused a much greater reaction.

New inflation forecasts in the euro zone

This is not the end of emotions. Today we have before us the decision of the ECB. Here, the potential for surprises is likely to be seen as much less than yesterday. The interest rate increase was announced by the bank's representatives, the market managed to price it in, and therefore itself an upward move of 25 basis points should not affect the euro significantly. Much more exciting for the euro, of course, is the outlook. Apart from the press conference of ECB president Christine Lagarde, new inflation forecasts may have a big impact. If they are revised downwards, then this may indicate an early end to the tightening cycle in the euro zone.

Source: OANDA TMS Brokers