FOMC meeting preview: Fed set to raise rates amidst inflation concerns

At its last meeting in June, the FOMC kept its Fed Funds rate on hold at 5-5.25% - its highest level since September 2007 to assess incoming data and the impact of its rate-hiking cycle.

“Holding the target range steady at this meeting allows the Committee to assess additional information and its implications for monetary policy.”

The minutes from the meeting noted that with inflation still well above the Fed's 2% inflation goal, maintaining a restrictive stance for monetary policy would be appropriate, and that further tightening would be needed to achieve this goal.

“Almost all participants noted that in their economic projections, they judged that additional increases in the target federal funds rate during 2023 would be appropriate.”

Federal funds effective rate

What is expected?

The Fed is widely expected to lift rates by 25bp to 5.25%-5.50%. Which means the real focus will be on forward guidance. The post-meeting statement will likely retain a tightening bias “additional policy firming that may be appropriate”.

In the press conference, Fed Chair Powell will likely reiterate a data-dependent approach and note that the June dots forecast higher rates ahead. Given the recent run of robust activity data, this point might receive more hawkish emphasis. Currently, the rates market assigns only a 35% probability of a second 25bp rate hike before year-end.

USD technical analysis

During the first half of 2023, the US dollar index tested and held support at 101.00/80 on three separate occasions before punching lower post this month's softer-than-expected CPI data.

The swift recovery back above 101.00/80 leaves the post-CPI sell-off to the 99.57 low, exposed as a false break lower. For followers of Elliott Wave, this is viewed as Wave V low, following the completion of a five-wave sequence from the 114.78 September high, as viewed on the chart below.

Should the DXY see a sustained close (two days minimum) back above resistance at 102.00/40, post tomorrow morning's FOMC meeting, it would confirm the wave count on the chart below and signal that a stronger recovery is underway initially to trend line resistance and the 200-day moving average at 104.00.

Aware that should the FOMC sound more dovish than expected, and the DXY index closes back below support at 101.00/80, it would signal that a retest and break of the recent 99.57 low is underway with scope to 97.00, as part of a Wave V extension to the downside.

USD daily chart