Federal reserve meeting preview: Steady rates expected amidst inflation concerns

The upcoming Federal Reserve meeting on Wednesday at 7 PM London time is expected to pass without significant announcements, with the Fed's funds rate predicted to hold steady at 5.5%. The only change that could shake up markets is if the dot plot suggests two rate cuts in 2024 instead of the three currently pencilled in.

When is the Fed anticipated to cut rates?
 

Market odds favour the first rate cut to occur at the September meeting. The rationale is straightforward. Headline inflation is at a high of 3.4% annually. The upcoming inflation data, expected just before the Fed meeting, might slightly cool to 3.3%. But that is still too high for the liking of the Fed.

Core inflation, another critical measure, remains high at 3.6%. Furthermore, recent data like the hotter-than-expected average hourly earnings, which rose by 0.4% (versus the anticipated 0.3%), and the addition of 272,000 jobs (surpassing the expected 182,000), complicate the Fed's decision-making.

The ISM Services PMI jumped significantly to 53.8, suggesting expansion, while the ISM Manufacturing PMI dropped below 50 to 48.7, indicating contraction, and the unemployment rate ticked up to 4%. Considering everything, it is fair for the Fed to wait to cut rates. Journalists may press the head of the Central Bank to consider rate increases, but he has firmly stated that this is not his main outlook. However, some of his colleagues might disagree.

Market implications
 

As long as the Federal Reserve maintains its stance of keeping rates unchanged and potentially cutting, the market is likely to remain stable. However, if the market begins to discount the possibility of any rate cuts, this could lead to a situation where the Federal Reserve maintains unchanged rates. This scenario could have significant implications for the Forex markets, and traders must be prepared for such a shift.

• EUR/USD: Given recent rate cuts by the ECB, Bank of Canada, Sweden, and Switzerland, and the Bank of England's plans to cut rates, the divergence could drive the EUR/USD lower, especially if it falls below 107.87. A break below that level could see it drop as far as 107.25, then 106.50.

• USD/JPY: In the case of the dollar-yen, surpassing 157.93 appears increasingly likely, potentially revisiting the 160 level as U.S. data continue to evolve.

• Gold (XAUUSD) prices are at a crucial point; a drop below the May 3rd low of 2,276 could lead to steep declines to 2,196.