US Fed's next rate decision weighs on greenback and markets

The US dollar staged an impressive comeback in February, gaining more than 2.8 per cent, but has weakened in the first week of March.

Trading conditions have not changed much, with intraday activity remaining high as stock markets continue their sideways journey and in range-bound fashion.

After breaching 1.10 levels earlier this year, the EUR/USD has retraced 1.05 lows — an almost 600-pip range.

The GBP/USD also finds itself trading in the 500-pip range.

Continuing uncertainty in markets on future US Federal Reserve action has made it a very favourable environment for short-term trades to flourish and capitalise on intraday movements.

Watch: US Federal Reserve chief warns of 'pain' in reducing inflation

Markets are still gyrating between US data releases and a perception of when the Fed will look to slow its current rate increase cycle.

The next meeting takes place on March 21 and March 22, and markets are currently pricing in a 0.25 per cent basis point increase.

Markets are also anticipating that the Fed's meetings in May and June will yield the same results before it holds steady through the second half of the year.

The recent run of Consumer Price Index (CPI) and Personal Consumption Expenditures Price Index (PCE) data are showing signs that inflation pressures in the US are decreasing.

However, a combination of other hotter-than-expected data points — particularly employment figures — have kept some key Fed members in check.

Employment has been a key sticking point for the Fed as it yields to inflationary pressures, so the weekly US jobless claims and coming payrolls reports will continue to cause market uncertainty and volatility in intraday trading.

This is similar to what we have been witnessing over the past few months.

February’s US Non-Farm Payrolls report will be released on March 10 and will be acutely watched.

January’s print registered a booming 500,000-plus new jobs but, since then, weekly claims have fallen below expectations for a seventh week running, which hints at a possible tightening in the labour market.

The picture is clearly uneven and March’s payroll report will give more insights to the true condition of the labour market.

The CPI report, due out on March 14, will also be of critical importance in determining the Fed's posturing.

At this juncture, the Fed is expected to deliver a minimum 25 basis-point increase in March.

But if we see a hotter-than-expected print, this could lead to increased expectations that the Fed could look at delivering a 50 bps increase, which would naturally result in the dollar rally from February continuing and vice versa.

The Fed's meeting this month will be of particular importance because it will also release its economic projections, which will paint a clearer picture of what it could do in the summer months leading into the second half of 2023.

The fickle nature of market expectations and uneven US data releases will result in major currency pairs such as the EUR/USD and GBP/USD continuing to remain choppy in intraday trading.

For the EUR/USD, 1.0530 levels look like good short-term support. So far in 2023, it has strongly held these levels while upsides should be capped at 1.07 levels.

Unless we have big surprises in the data releases, this range should hold in the lead up to that all-important Fed meeting.

The cable's range is even tighter — I am seeing 1.19 levels holding on the downside while upsides should be capped at 1.2170 levels in the lead up to the meeting.

Gold has recovered since its sell-off from $1,950 in February and currently finds consolidation at $1,850 levels. Short-term downsides will be capped at $1,800.

Ultimately, markets will remain choppy, as we have seen since the start of 2023.

This provides opportunities on a short-term basis with tight stop losses and aggressive risk management.

For longer term positional trades, it will prove prudent to await the Fed's policy after its meeting concludes on March 22.

Gaurav Kashyap is risk manager at Equiti Securities Currencies Brokers. The views and opinions expressed in this article are those of the author and do not reflect the views of Equiti Securities Currencies Brokers