Will a dot plot be crucial?

Yesterday's rate increase by the Bank of Japan aroused market interest, but today the attention is shifting to the US, which means that the cost of money will be decided by the Fed. The market is wondering whether we can expect anything more than Powell's conference that brings nothing. All in all, it's pretty clear that The Federal Reserve will start cutting rates no earlier than June. Investors will focus mainly on new forecasts but also on comments on recent inflation results.

Real risk of dollar weakening?

In my opinion, the market will largely evaluate the new "dot chart". The December projection indicated three cuts this year. If we see a change here, the dollar may react more decisively because the market will adjust its valuation. Currently Fed Fund Futures indicate 3 moves down this year, 25 basis points each. Recent data on inflation and the current economic climate suggest that a hawkish Fed turn may be more likely. If the curve shows higher rates in the medium and long term, the dollar may gain and Wall Street may receive an argument for a larger technical correction.

Please note that stock indices have been rising continuously since the end of October. It is true that there were declines during this period, but their scale did not exceed 2,5%. The most recent downward correction was last year, which started during the holidays. Since then, market sentiment has continued to point to high risk appetite. Let's remember that since December the Fed has become more cautious about interest rate cuts. If such a scenario were to come true, EUR / USD exchange rate could quickly reach the round level of 1,08 and at the same time equalize the lows from the end of February and the beginning of March this year. If the scale of the surprise were greater, the next ceiling is 1,07 - this is the low reached in the middle of last month. I assume that the risk of USD weakening during today's events is real, but in my opinion less likely.

Exaggerated market expectations

Instead of strengthening himself after yesterday's decision, Jen reacted in the opposite way and did the same thing Price USD / JPY was again in the zone close to historical records this morning. This fact increases the risk of sudden currency intervention by the BoJ or the Ministry of Finance. Recall that the Bank of Japan raised its main interest rate, thus ending its negative interest rate policy. He also abandoned yield curve control. However, it is unlikely that further steps will be taken quickly. And it was this fact that caused the yen to lose, instead of appreciating, quite significantly, which shows that the market expectations that have accumulated in recent weeks were definitely exaggerated.

Source: Łukasz Zembik, OANDA TMS Brokers