Summary:

• The Fed is expected to increase rates, make a hawkish shift on Wednesday
• Traders will look into statement, dot-plot for changes
• Decision and materials will be published at 6pm GMT on Wednesday, conference begins 30 minutes later 

The March FOMC meeting is by far the most anticipated market event this week. Traders look not only for the first interest rate hike this year but also for clues. These clues may determine market reaction and we look at them in this analysis. We also present current situation on D1 charts of EURUSD and US500.

What to expect from the Fed?

The FOMC meeting includes few important points – interest rate decision, post-meeting statement, economic projections, dot-plot and post-meeting conference. Decision seems to be obvious – the Fed will increase rates by 25bps – anything other than this would be a shock. However, traders want to know if the Fed is ready to increase pace of tightening from that communicated in December (3 hikes for this year). Interestingly, analysts surveyed by Bloomberg already expect 4 hikes for 2018 but many of them thinks the Fed will shy away from communicating this in March. There are 3 ways it can do so:

• statement – post-meeting statement could suggest that risk to the outlook has changed to the upside (from balanced in December) – we think it’s relatively unlikely 
• dot-plot – the chart suggesting where FOMC members see rates in the future could point at 4 hikes this year. This also seems unlikely. Do notice that in December’s dot-plot even support for 3 moves this year was somewhat weak (there were 6 dots below and only 4 above) so a shift of median to 4 hikes would require a major shift of views. A shift of long term expectations is more likely – here a median was at 2.75% and it seems a move to 3% would be natural given strong economy and fiscal impulse. A move to 3.25% could already have major market consequences. 
  

   A significant shift of longer-term rate expectations at the Fed is more likely than 2018 projections. Source: federalreserve.gov, XTB Research

• post-meeting conference – Jerome Powell could suggest that the Fed could hike rates faster than the market currently expects. We would see this as likely if he were Mark Carney. But he isn’t. Powell didn’t tell too much during his testimony in February and there are few reasons for him to shake the markets now. 

How will markets react?

The more hawkish the Fed becomes, the better for the dollar and worse for stocks. At present, the consensus sees a minor hawkish shift (small dot-plot changes plus slightly more upbeat statement) so no changes whatsoever would be actually dovish.

EURUSD

The pair seems to be well supported around 1.21-1.2150 and for as long as these levels hold we are looking at an upwards trend. Do notice that these supports have not been broken despite a negative impact of a double top formation. Sellers will need strong cards to move the pair below on Wednesday. 

EURUSD continues to be supported above 1.21-1.2150. Source: xStation5 

US500

After reaching a 78.6% retracement of February slide, US500 reversed clearly lower. Do notice that volume is high on a down (red) candles, suggesting that bears are yet to give up. The nearest support can be seen at around 2650 points.   

Bears remain in play on US500 after a pullback from 78.6% retracement. Source: xStation5