Fed preview: Upward revision of 2019/20 interest rate forecast could yield USD rally

The Federal Open Markets Committee, under the leadership of Jerome Powell, is likely to raise interest rates by 25 basis points and reaffirm the plan to gradually reduce the size of its balance sheet.

Expectations are fairly high that Fed will likely revise higher the 2018 dot plots to four rate hikes. Many believe this will be a hawkish outcome, although the greenback says otherwise...

Dollar index weekly chart

Source: Netdania

The last three doji candles indicate the investors are not particularly impressed by the talk of possible upward revision of the 2018 interest rate forecast.

This is because faster Fed rate hikes in the short-term would only push the Fed closer to the ceiling - new normal or long-term neutral rate of 2.75 percent. (Back in 2012, the rate stood at 4.25 percent). Hence, the resulting rally in the greenback could turn out to be a bull trap. The dollar index may face rejection at the descending trendline resistance and resume the sell-off. 

However, the greenback will likely cut through the descending trendline resistance seen around 92.80 and test the 200-weke MA of 94.29 and the 10-year could break above 3 percent in a convincing manner, if the Fed pushes up its forecast of the long-term neutral rate (revises 2019/20 interest rate forecasts higher).

Also, investors could begin pricing-in a higher long-term neutral rate if the Fed focuses more on the inflationary impact of the trade wars.

Hawkish scenario

  • Fed revises higher its 2019/20 rate forecasts and/or focuses more on the inflationary impact of the trade wars/US protectionist policies.
  • Fed keeps long-term rate forecasts unchanged, but revises higher its 2018 dot plot to four rate hikes and mentions upside risks to inflation on account of trade wars, thus forcing markets to price-in the possibility of an upward revision of the neutral rate in the near future.

Dovish Scenario

  • Fed revises higher the 2018 interest rate forecast to four rate hikes as expected and uses strong words to mention downside risks to GDP due to trade wars.
  • Fed keeps 2018 interest rate forecast unchanged, uses strong words to mention downside risks to GDP due to trade wars.

Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.

Analysis feed

FXStreet Trading Signals now available!

Access to real-time signals, community and guidance now!

Latest Forex Analysis

Editors’ Picks

EUR/USD: Bulls in control above 1.1100 starting out ECB week

Following the bounce from near 1.1100 in early Asia, EUR/USD has entered a phase of consolidated near 1.1140 region ahead of the European open. Bulls await a fresh impetus for the next push above the 1.1150 mark ahead of Eurozone/ US PMIs.


GBP/USD recedes from three-week top above 1.2400, UK Manufacturing PMI eyed

GBP/USD prints three-day winning streak amid broad US dollar weakness. Calls of further help to British employees add to the upside momentum. Downbeat Brexit headlines confront the UK’s coronavirus optimism. The UK/US PMIs will join qualitative catalysts.


FX Today: USD hit by escalating US riots, risk-on mood; US ISM PMI eyed amid light trading

The US dollar took a beating across the board starting out a new month/ week, as markets breathed a sigh of relief on the US’ softer stance on China. The dollar weakness was also backed by the escalating riots in the US cities, with curfews imposed on major cities. 

Read more

Gold: Teasing a rectangle breakout, $1750 in sight

Gold bulls gathering pace for the next push higher. The extension of last week’s rally in the yellow metal is mainly driven by the sell-off in the US dollar across the board, in the wake of US-China trade war relief and escalating US riots.

Gold News

WTI: Overbought RSI challenges the bulls above $35.50

WTI seesaws around 7-week-old resistance line, retreats from highest since March 11. A short-term ascending trend line on the bears’ radars during the pullback. 100-day SMA, 61.8% Fibonacci retracement together offers strong upside barrier.

Oil News

Forex Majors