Forex morning meeting: Focus on the Fed

Key points of the article:

• What will be the decision of the American central bank?
• USD / JPY: The dollar yen at a crossroads

Currency table – Time horizon: daily

What will be the decision of the American central bank?

The forex market has remained quiet overall ahead of the week’s event.

In the minutes of its meeting tonight, the Federal Reserve is expected to signal that it is ready to raise interest rates as early as March and will consider further tightening measures, reversing the easing policies it had put in place to fight the pandemic.

The central bank is expected to release a new statement demonstrating its commitment to fighting inflation. In the context of a violent stock market correction, Fed officials should say they are ready to raise the federal funds rate, which is currently at zero, as early as March.

The bond market appears to be reacting to falling stocks, as well as geopolitical tensions, so perhaps the Fed will not be as aggressive as it otherwise would have been. But the Fed is unlikely to go against the market, which is pricing in four rate hikes this year. The consumer price index rose 7% in December, the highest level since 1982, and the fight against inflation has returned to the center of its policy.

The US central bank may indicate that its first rate hike since 2018 may come as soon as its next meeting, which will take place in March. He made a similar comment in 2015, in the statement a month before his first rate hike since the financial crisis. The question is whether it will indicate the extent of this increase. Markets expect 25 basis points but fear 50 basis points.

The stock market sell-off made the Fed’s job more difficult. The S&P 500 plunged Monday before recovering. With the pandemic continuing and Russia threatening military action against Ukraine, the Fed will need to recognize these risks.

Bank officials will also discuss reducing their balance sheet by nearly $ 9 trillion, which more than doubled during the pandemic. At their December meeting, central bank officials discussed the balance sheet and some strategists expect the reduction to begin in June or even as early as May.

The central bank’s asset purchase program, which is expected to end in March, was the main contributor to the size of the balance sheet. The Fed bought $ 120 billion worth of Treasury and mortgage-backed securities a month, but scaled back its purchases.

Once this program is done, Fed officials should start considering how they will cut the budget. Currently, the Fed replaces maturing bonds with market purchases. It may modify this transaction and take other measures, such as changing the duration of the securities it holds.

USD / JPY: The dollar yen at a crossroads

The dollar yen maintained its support at 113.46. Exceeding this threshold could lead it to reach the next support at 112.56, soon joined by the 200-period moving average. The outlook would turn very negative below this level.

The crossing of the 34-period moving average and the bearish bias would give a positive signal that could see the dollar return to 115.00 and beyond reach a high of 116.35. The uptrend could then resume.

Evolution of the dollar against the yen in the daily data:

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