US FOMC meeting and an interest rate hike for June


The American dollar aims to close the week at record highs against most of its rivals, as the next FOMC meeting looms: the US Federal Reserve will have its monthly meeting next Wednesday, March 18th.  


Patient

In the January policy meeting, the FED came out with a pretty hawkish tone, anticipating a rate hike for this year. After changing the usual "low rates for an extended period" for the word "patient", Mrs. Yellen finally clarified that a move in rates wouldn't be likely at least until April. But the Minutes of that meeting, released mid February, showed that FED's officials are having trouble to digest a rate hike with a stubbornly low inflation; officials also expressed their concern about how the economic slowdown going on outside the US, may affect the local economic growth. 

Following those Minutes, the American dollar weakened, particularly against overbought EUR and JPY, but it didn't took long for a USD return: Non Farm Payrolls released early March showed that the US economy added 295,000 jobs in February, whilst the unemployment rate fell down to 5.5%, a 6-year low, pushing the greenback back higher on hopes the Central Bank will anticipate its move. Anyway, not everything that shines is gold: despite the outstandingly positive figures, wage growth missed estimates, with  average hourly earnings rising 0.1% month-on-month, and 2.0% annually. If something, the problem of low wages is currently limited by falling oil prices that dragged energy prices lower and USD strength that result in a higher purchasing power for local consumers. 

Also, there is  a general consensus that FED's members will like to see wage growth before beginning the tightening path, but that is not a sine qua non condition. Furthermore, Janet Yellen said that the Central Bank may remove the world "patient" before making a move,  so the market will be completely focus in it next Wednesday. At this point, market expectations are of a rate hike by June. So the question the FOMC needs to answer next Wednesday is if current employment situation and inflation is enough to raise the interest rates by then.

The immediate market reaction will likely be related to the existence or not, of the word "patient" in the statement:  if the word is missing, investors will likely rush to price it in, triggering strong USD dollar gains across the board. If on the other hand, the wording does not change, the dollar will likely fell sharply intraday, but for the most, it will be seen as an opportunity to buy it cheaper as the rate hike for the summer will remain in the background.


Impact on the EUR/USD 

The EUR/USD pair  trades around 1.0500 against the greenback, a multi-year record low. And no matter what the FED does, the dominant bearish trend will prevail, as the remarkable imbalance between both Central Banks won't change: the FED will raise rates in the year the ECB begins what the rest of the world has been doing for over 5 years. The upward potential in the case of a dovish FED may drive the pair up to this week high around 1.0680, but selling interest will likely surge in a vengeance around the level. A hawkish FED on the other hand, will be what it takes to push the pair towards parity even before the Central Bank actually makes a move. 

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