22.03.2023 10:54 AM
Markets await the Fed's decision on monetary policy

Markets await how the Fed plans to deal with high inflation and the current banking sector crisis. Most believe that Chairman Jerome Powell will try to balance the two, but that is rather difficult to achieve.

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While many economists expect a quarter-point interest rate hike, some are convinced that the central bank should take a pause in order to strengthen financial stability. Of course, an increase of even a quarter point will not significantly alter the balance of power in both the stock and currency markets, but a pause in the cycle of monetary policy tightening is another matter entirely.

The Fed also has to decide how far they are prepared to go in order to bring inflation back to the target level as quickly as possible while risking further turmoil in the banking sector. Three regional banks have already announced bankruptcy and there is no guarantee that such problems will not recur any time soon.

Wall Street banks are divided on whether the Fed will suspend or raise rates.

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Another important element of the meeting is the updated rate forecasts for this year. At the moment, the markets estimate an 80% chance that the Fed will raise rates by a quarter point, to 5%, the highest level since 2007 on the eve of the global financial crisis.

In fact, expectations have dwindled over the past two weeks amid the collapse of three regional US banks and the takeover of Credit Suisse in Switzerland. As long as the US banking sector problems remain under control, officials are expected to continue, or even potentially intensify their campaign to raise interest rates and curb price increases.

Clearly, there are no easy solutions. Powell could signal that the Fed is unsure about the soundness of the banking system or the economy and point to problems that are not yet visible to the market. A rate hike could increase stress for banks and spook investors, which would also discourage them from buying risky assets.

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In any case, whichever scenario Jerome Powell chooses, the market will be subject to stress. The most important guideline will be the market reaction to everything that is going on, as the Fed chairman's statements can be interpreted in different ways. It is best to wait for the planned decisions and then, after analysis, enter the market.

For now, bulls still have all the chances to renew the March highs, but to do this they need to hold the quote above the support level of 1.0760. That will allow the pair to rise beyond 1.0800 and head towards 1.0835 and 1.0875. In case of a decline, the pair will fall below 1.0760 and hit 1.0720 or 1.0690.

In GBP/USD, bulls are ready to keep storming the monthly highs, but they have to keep the quote above 1.2230 and break through 1.2280. That will push the pair to 1.2330 and 1.2390. Should bears take control of 1.2230, a slide towards 1.2180 and 1.2130 is possible.

Jakub Novak,
Analytical expert of InstaForex
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