Today, at the close of the American trading session, we will learn the results of the March meeting of the Federal Reserve. Perhaps, this is the most significant event of the week (and month) for dollar pairs. And primarily for the euro-dollar pair, which has been sliding down for the third consecutive day.
The "green tint" of the inflation reports published in the U.S. last week allowed the EUR/USD bears to seize the initiative and pull the pair into the range of the 8th figure. The results of the March meeting of the Federal Reserve members can either strengthen the downward trend or return the pair to the boundaries of the 10th figure. It will all depend on the degree of "hawkishness" in the accompanying statement and Jerome Powell's rhetoric. But the main intrigue of the March meeting is the updated dot plot.
Anticipating ahead, it is necessary to note that the current situation is quite dangerous for the American currency. The greenback may fall victim to inflated expectations, as has happened more than once. The acceleration of February inflation certainly contributes to the tightening of the central bank's rhetoric, but there are several "buts" here.
Firstly, the Fed may leave June as the most likely date for a rate cut, announcing only the maintenance of a wait-and-see position at the May meeting (this fact has long been priced in). Secondly, the regulator may maintain its forecast for the scale of monetary policy easing. Recall that following the December meeting, the dot plot was updated—it showed that Fed officials forecast a 75-basis-point rate cut by 2024.
Following the March meeting, the dot plot will be updated again. And if it shows that the Federal Reserve still largely supports three 25-basis-point rate cuts within the current year, the dollar may come under strong pressure.
It is necessary to note here that according to the CME FedWatch Tool, the probability of maintaining the status quo at the March meeting is 99%, at the May meeting - 95%, and at the June meeting - 40%. The probability of a rate cut in June is estimated at 60%. That is, the chances of monetary policy easing in June are 60/40. The Federal Reserve could well tilt the scales in one direction or another.
In my opinion, the outcome of the March Federal Reserve meeting will not be in favor of the dollar. But not because of excessive dovishness of the American regulator but because of inflated market expectations.
Thus, the majority of economists surveyed by Reuters stated that the median value would indicate a smaller, rather than larger, rate cut this year. About 85% of respondents (45 out of 54) stated that against the backdrop of recent inflation reports, they see a greater risk that the first rate cut will occur later than June, rather than earlier.
Recall that according to the latest data, the overall Consumer Price Index showed acceleration (on an annual basis), while the core CPI decreased again. But it is important to remember that the core PCE index still demonstrates a consistent decrease, and February Nonfarm Payrolls reflected a rather contradictory situation in the labor market.
So, unemployment in the U.S. unexpectedly rose in February to 3.9%, while most experts expected to see it at the previous level of 3.7%. The average hourly wage rate increased by only 0.1% on a monthly basis (the weakest growth rate since March 2022), while the forecasted growth was at the level of 0.4%. On an annual basis, the indicator reached 4.3%, after being at 4.4% for two months. In February, the indicator was also expected to remain at 4.4%. The labor force participation rate was 62.5% in February, with a forecast of 62.6%. The nonfarm payroll employment figure in February reached 275,000, but the results of the previous two months were revised downwards, totaling 167,000.
All this indicates that the intrigue regarding the outcome of the March Federal Reserve meeting persists. It is also worth noting that the consumer price index and producer price index were published during the "quiet period." That is, we will hear the assessment of these releases directly from Powell at the final press conference (and see it in the accompanying statement, of course).
Will there be a shift towards lowering the median dot plot forecast? This is the main intrigue of the March meeting. In favor of the "yes" answer is the impressive growth of the U.S. economy in the fourth quarter of 2023, the acceleration of the overall CPI and PPI. In favor of maintaining the forecast at the December level (3 rate cuts in 2024) is the weak ISM manufacturing index (it fell to 47.8), the consistent decrease in the core consumer price index and core PCE index, as well as the contradictory February Nonfarm Payrolls.
In my opinion, the dot plot for this year will not change, but the long-term plot will rise. The Federal Reserve will outline a plan to reduce QT and forecast that this reduction will begin "soon."
Will such a scenario satisfy the appetite of dollar bulls? Unlikely. This means that in case of such a scenario realization, the dollar will come under pressure, even if the Federal Reserve is concerned "in words" about the acceleration of inflation.
Therefore, all attention is on the dot plot.