THE USD Facing the Fed's Decision

FUNDAMENTAL OVERVIEW

Today marks the conclusion of the first monetary policy meeting of the year by the United States Federal Reserve (Fed). No changes in interest rates are expected, which have remained constant at 5.25% - 5.5% for the past four meetings.

In his speeches, the bank's president, Jerome Powell, has emphasized their continued reliance on data not only regarding inflation, in terms of achieving a sustained reduction towards the 2% target, but also considering other economic variables such as employment and production to determine to what extent the economy will continue to strengthen with rates at current levels, which represents a delicate balance to achieve.

The main focus of the day is to determine the approximate date for the start of monetary easing through Powell's speech. However, Powell and the other FOMC members have stated that this scenario will not be anticipated.

According to the latest data from the CME's FedWatch tool, the probability that the Federal Reserve will keep interest rates unchanged at the March meeting continues to rise and today stands at 54.4%, with a probability of a cumulative 25 basis point cut at 44.7%.

Scenario 1: Bullish for the USD

"If Powell states that the economy is showing signs of improvement and they anticipate a steady decline in inflation towards the 2% target, but it does not necessarily mean they will wait for this target to be strictly met, we may see a new surge of USD in the short term. If he does not mention the potential start date of easing, it still could further boost USD demand.

Scenario 2: Bearish for the USD

If Powell hints at the possibility of easing starting after the summer, considering the stable trend towards disinflation and possible labour market slowdown, the dollar will retreat again.

Scenario 3: Bearish for the USD

If Powell confirms that the bank will start easing between May and June after observing a solid downward trend in inflation and possibly even acceleration. In addition to a possible negative impact on the labour market and other production sectors.

Technical Analysis Dollar Index (DXY)

It broke a key H4 support at 103.15 whose confirmation with a second lower low will indicate a bearish reversal for a more extended macro correction towards 102.77, especially in scenarios 2 and 3 of the Fed. However, if this first breakout is not confirmed, it is possible that the rebound will again target the opening zone of the day (D1:O) at 103.41 and of the week (W1:O) at 103.56, indicating the intention to break resistance at 103.82 towards 104.00. This reflects a more aggressive stance by the Fed or less willingness to lower rates in the first half of the year.

EURUSD

It had a significant rebound after today's low labour data and the Chicago PMI also failed the forecast, so quotes challenge the last resistance at 1.0886. A new rebound above this resistance will confirm the bullish reversal of the pair, a likely scenario with moderate rhetoric from President Jerome Powell, leaning towards scenario 2 or 3.

However, it is important to pay attention to the speed of the price retracement in the next few hours, especially if the opening zone around 1.0841 is broken and continues towards today's POC around 1.0819, today's buying area. An aggressive decline may result from a more aggressive stance by the Fed.

A decisive breakthrough of the support at 1.0806 will indicate the culmination of the current correction with a target to confirm the continued bearish move below 1.0796 towards the uncovered POC* at 1.0786.

The price reaction to Jerome Powell's speech may cause high volatility movements in both directions, given the unpredictability of the market's reaction to Powell's comments, which is why we do not estimate the order of movements on the charts in this analysis.