FOMC Preview: Hints on future actions

• US Federal Reserve comfortable maintaining the status-quo throughout 2020.
• Market players waiting for clues on future developments related to the balance sheet.
• USD the strongest, rally to continue despite overbought signs.

The US Federal Reserve will have its first monetary policy of 2020 this Wednesday, but the market is heading into the event with not many expectations. After cutting rates three times in 2019, policymakers adopted a wait-and-see stance, comfortable with the current level. In the December meeting, Chief Powell hinted that no rate cuts, neither hikes are now at sight. The announcement played temporarily against the greenback and got the usual criticism from US President Trump.

Fed’s polices need no adjustment

Nevertheless, the Fed’s stance seems proper: some parts of the economy are giving signs of recovering modestly, while the US-China phase one of the trade deal has taken of some of the pressure on policymakers. Inflation in the US is stable at around 2.0%, while employment levels haven’t been a problem for years.

 In this scenario, a change in the monetary policy seems highly unlikely, moreover considering there are no fresh forecasts this time, and that the December ones indicated that voting members foresee no rate moves through 2020.

At this point, the CME Group’s FedWatch tool indicates that chances on an on-hold stance stand at 87.3%, while the other 12.7% thinks the Fed will hike.

Hot topics to be discussed by Powell

As usual, Chair Powell will hold a press conference following the release of the statement, and that is what could activate investors and trigger some action across the board. Back in December, the FOMC made it clear that they will be closely watching data to determine whether more action would be needed or not. Anyway, most experts agree that policymakers will continue to hold fire, although some hints regarding a shift in the current stance could unwind sharp moves.

Another hot topic will be the balance sheet. The central bank has been buying US Treasury noted at a rate of $60 billion a month, and it’s unclear for how long or up to what level policymakers are willing to expand the balance sheet. However, and considering that the monetary policy will remain highly accommodative, there are little chances that Powell will define details on future actions.

Overall, we can say that speculative interest is in search of some mid-term clarity, and Powell won’t provide it.  Whether if that would disappoint investors or not, is something to be seen. Worth mention that Chief Powell tends to be hawkish in his words, which means that the market could react sharply on a dovish stance.

EUR/USD technical outlook, levels to watch

The American dollar is the strongest ahead of the event, and chances that the Fed would affect the ongoing trend are quite a few. The greenback is not only backed by the ongoing risk-averse sentiment, but also because the economy is in better shape.

The EUR/USD pair is near the 1.1000 level ahead of the event, and while it could correct higher during the upcoming sessions, it is intrinsically bearish. A critical support level is 1.0980, where the pair bottomed by the end of November. A break below it should see the pair nearing 1.0878 the multi-year low achieved last year.  

Relevant resistances are located at 1.1060 and around the 1.1110 figure. Above this last, the pair could near 1.1200 before selling interest found it interesting to add shorts.