FX.co ★ Decreasing US inflation may not necessarily lead to a pause in Fed rate hikes

The Fed's two-day monetary policy begins today, and this could deal both negative and positive impacts on global financial markets. An announcement pertaining to the end of the interest rate hike cycle, followed by a period of rate cuts, will likely lead to a surge in demand for stocks and a weakening of dollar.

However, the focus today will not be solely on the start of the Fed meeting, but also on the release of key inflation data in the US. The figures will undoubtedly influence the central bank's decision on interest rates, especially since forecasts say the year-on-year consumer price index will fall from 4.9% to 4.1%, while the monthly growth will slow down from 0.4% to 0.2%.

If the data aligns with expectations or comes out slightly lower, stocks will continue to rally and the Fed will be convinced to take a pause on rate hikes. But if inflation unexpectedly rises, sell-offs will be seen in stock markets, which will lead to an increase in Treasury yields and a surge in dollar.

As of now, the market does not consider any negative possibility, focusing instead on a positive scenario. To be precise, the dynamics of federal funds rate futures show a 76.9% probability that the central bank will leave all parameters of monetary policy unchanged, including the level of the key interest rate.

However, investors may not be taking into account or simply choosing to ignore the divided opinions of central bank members.

If the desire to continue taking advantage of the situation persists, as long as the economy avoids a recession and the labor market remains strong, there could be a push to control inflation by raising rates even if today's data show a decrease in inflation on a year-on-year basis to 4.1% or below 4.0%.

Forecasts for today:

AUD/USD

The pair trades at the resistance level of 0.6775. If US inflation data shows a decrease and the Fed announces a pause in interest rate hikes, there will be a rise to 0.6820 and 0.6900.

NZD/USD

The pair trades at the level of 0.6145, fueled by overall optimism and the possibility of a rate increase from the Reserve Bank of New Zealand (RBNZ). A further growth towards 0.6300 may be seen in the near future.