With US economic data showing a hint of growth, it is unlikely that Fed will lower dot plot as well as economic projections. Powell’s cautious tone could be hawkish to investors. Long USD/JPY?
Fed is widely expected to let rates remain unchanged, but there are three questions that will be on the market’s mind tonight:
- Will the “dot plot” fall from two rate hikes to only one for 2019?
- Will Summary of Economic Projections (SEP) that includes both the inflation and growth forecast be cut?
- Will Powell stick to his cautious tone, reiterating the mantra of “patience” which is a sign of hawkishness to investors?
The “dot plot” forecast was lowered by Fed back in December of 2018 from three rate hikes to only two in 2019. Fed repeatedly mentioned that they are in no rush to hike rates and it will be very much “data-dependent”.
Therefore, if Fed were to lower the forecast to one or even zero for 2019, the bears will take the lead, causing the dollar to fall lower. However, Powell has made it clear in 2018 that the “dot plot” is just a gauge and should not be used as confirmation of Fed’s forward guidance.
The SEP was also lowered back in December of 2018 with GDP forecast lowered from 2.5 to 2.3% and core inflation from 2.1 to 2.0% for 2019. The market will be curious to see if Fed were to further slash the economic projections. We feel that it is unlikely as the US economy has been doing well with stocks recovering and oil prices up by 40%. The labour data, manufacturing and service sector activity have shown improvement since the start of 2019. However, inflation growth has been muted, falling from 1.9 to 1.5%. This gives Fed no reason to increase rates yet, but they could hold optimistic views that the economy is heading in the right direction.
Therefore, we believe that Fed may leave SEP unchanged until more data is out to prove that the economy is indeed overheating.
Lastly, Fed Chairman Jerome Powell’s press conference will be the main focus. His cautious tone back on 8 March 2019 citing muted inflation and downside risks such as Brexit and trade should remain unchanged as the issues stated remain.
If Powell were to focus on the improvement of economic data, this could push the dollar higher. USD/JPY could break the 112.00 resistance and rise towards 113.00.
Fullerton Markets Research Team
Your Committed Trading Partner
