​FOMC preview: will rising inflation and jobs data force Powell’s hand?​​

The Federal Open Market Committee (FOMC) are back in the fray this week, with the latest two-day meeting set to conclude on Wednesday 28 April.

Outlook brightens as vaccinations keep Covid-19 deaths down

The Federal Reserve (Fed) meet at a time of optimism for the US economy, with improving indicators emerging across the board. An uneven recovery was always likely, yet US President Joe Biden’s $1.9 trillion coronavirus rescue package seems to have provided a welcome boost ahead of the real economic resurgence.

​Unlike the UK, the US has been avoiding social restrictions where possible, yet the vaccination push will certainly have an effect on the ability to reopen in a more convincing manner. The charts below highlight how the US currently stands in third place, with 42% of the population having received a dose of the vaccine. An impressive feat for a country that has a population of over 330 million people.

Importantly that rise in vaccinations has helped drive deaths lower, with the fatalities continuing to slide through the rise in cases seen in early-April.

Yields ease back despite economic outperformance

Set against the backdrop of improving reopening prospects, the economic picture has been gaining traction as seen by falling jobless claims, rising purchasing managers index (PMI) surveys, surging retail sales, and a spike in non-farm payrolls.

However, that has interestingly failed to lift yields since the last meeting, with the US 10-year drifting lower despite the gradual move towards normality.

​This perhaps highlights the fact that while economic is showing signs of improvement, there is a concern that it may be a fleeting result of Joe Biden’s $1.9 trillion support package.

From an inflation perspective, the Fed appear willing to let things heat up over the near term. The year-on-year (YoY) reading of 2.6% for March comes in part due to base effects, but are also reflective of a short-term reopening effects.

Nonetheless, the Fed chair Jerome Powell has already stated that he is expecting the rise in inflation to prove fleeting in nature. Once again, markets will be looking out for any signs over just how long the Fed will withstand above average target inflation.

​Powell previously stated that the Fed will only start raising rates once the labor force has fully recovered and inflation is sustainably above 2%. That is currently forecast for 2023, with the dot plot highlighting the fact that most members see rates staying rock bottom for the foreseeable future.

What will traders focus on at this meeting?

Traders expect little change to the headline monetary policy stance, with the markets pricing in a 97% chance that the FOMC will keep rates steady on Wednesday.

We have no staff projections at this meeting, leaving traders to focus on the wording around the decision. Invariably we will see the Fed taper their asset purchases well before rates rise, and the FOMC will need to pave the way for such a move.

As such, any clarity over exactly when that tapering will occur will be a major factor going forward. Nonetheless, with the economic recovery only starting to take shape, the Fed are likely to be cautious on the topic of whether they are going to start positioning themselves for any tapering of the current $120 billion per month asset purchase programme.

​As things stand, it seems likely we will see Jerome Powell lead a more cautious line as economic improvements and above target inflation run the risk of being somewhat temporary in nature.

Dollar index technical analysis

The dollar has been on the back foot over the past three-weeks, with the index turning lower after a rally into the 76.4% Fibonacci resistance level at 93.46. This raises the possibility of further downside from here, in a bid to continue the bearish trend that has been in play over the past 13-months.

​Crucially, we have a major double top neckline down below in the form of the 87.93 mark, which could spell trouble for the dollar. Nonetheless, with a bearish trend still in play, we will ultimately need to see a break up through the 9.40 region to start building a more bullish picture. Until then, the bears could dominate as we move forward.

From a daily perspective, this recent pullback takes us into a 76.4% Fibonacci support level at 90.56. A break below that point would go some way to raising the possibility that we continue this bearish move. However, we will ultimately need to see a break below 89.65 to bring an end to the recent recovery phase that looks to be a potential ABC-style retracement into 76.4% resistance.