Fed to Hike Again But What Will Follow?

The main focus for traders today, and indeed for the week, will be the FOMC rate decision this evening. Expectations have been shifting wildly since the last meeting and recent market developments have added to uncertainty. Rate hike projections have bounced back from the “no hike” expected last month to the almost fully priced in .25% hike expected now. However, the greater focus is on the outlook beyond today’s decision and whether the Fed chooses to pause after this meeting or signals further hikes to come.

Inflation Still Key 

Inflation has been cooling steadily in recent months, allowing the Fed room to pivot lower on rates. With CPI still well above target, however, recent strength in Q1 corporate earnings suggested that the Fed likely still has room to press ahead with further hikes in a bid to bring inflation down quicker. In recent weeks, however, the backdrop has shifted again. The return of concerns for the US banking sector, as well as a greater emphasis on recession forecasts over the second half of the year, has muddied the water suggesting that the Fed might take a less hawkish view.

Recession Risks & Rate Cut Pricing

Additionally, traders will be looking to see how the Fed addresses the growing rate cuts being prices Iater in the year. Recession risks and banking sector stability will be key focus points for the market at this meeting and it will be down to Powell to strike the right tone to help keep markets stable. If Powell is seen pushing back against rate cut forecasts for later in the year, this should help firm USD up while pulling stocks lower near-term. Similarly, if Powell is seen leaving the door open for further tightening in coming months. However, if Powell signals that the Fed will likely pause after this hike or is seen not striking a firm enough tone against rate cut chatter, this should see USD sold and risk assets rebounding firmly higher.

Technical Views

Dow Jones

Despite a firm rally off the March lows, the index remains capped by the 34523.58 level for now. With momentum studies turning bearish, risks of a correction lower are growing. With this in mind, 33576.05 is the key level to watch. Below here, the 32072.32 level is the next big support to note. While 33576.05 holds as support, however, the focus is on an eventual break of resistance and a move up to the 33503.24 level next.