Today could be one of the most important days of the year, as it might be the day when the Federal Reserve will end the rate hikes cycle. Estimates point to a 25bps rate hike while there is 10% chance for a pause.

Careful of the General Consensus

One of the most important things to keep an eye on is the general consensus. The markets are convinced that the Federal Reserve will do one more rate hike and will pause right after. This explains why the US equities had 5 weeks of consecutive gains.

So what if the general consensus is wrong? When everyone is on the same page, you always need to take a step back and review the data away from the general consensus.

The recent data showed a clear sign that inflation is on the right track, but the core inflation is clearly sticky. On the other hand, the jobs market is too tight, while the GDP showed a notable slowing down in Q1 and under 2%. Is this a good reason for the Fed to pause? Yes.

Another factor to keep in mind is the recent banking crisis. The Federal Reserve is aware that further rate hikes might lead to further troubles for regional banks which is what the markets are fearing right now. Therefore, its highly likely that the Fed will try to be as balanced as possible today.

Clear Message is Needed

Even if the Federal Reserve decided to raise rates in this meeting, the Fed will have to be balanced and clear regarding the upcoming meetings. It is highly possible that the Fed will send out a clear message that this is the last rate hike.

At the same time, the next question would be, for how long the Fed will keep the rates at these high levels? In the previous meeting, the Fed said that rate cuts this year is not on their agenda. If this changes in this meeting, markets will start pricing in rate cuts ahead of time.

Market Reaction

25bps rate hike is almost 100% priced in, whether in currencies, bonds, or indices. But what’s not priced in yet is the date of the first rate cut. This is what everyone will be looking for in this meeting, find any clues if the Federal Reserve will think about rate cuts or not.

DXY has been trading within the same tight range for over 3 weeks now, unable to break above 102.0 or below 101, while today is likely to be the catalyst for a trend change.

Our Trades

Currently, there is no change to our portfolio, we will keep all our trades ahead of the Federal Reserve’s decision. This includes currencies, stocks, commodities, and options. Stops are not to be changed. Until further notice. We will discuss new trades during the live trading session.

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