Federal Reserve officials are widely expected to leave interest rates unchanged near zero when they conclude a two-day policy meeting on Wednesday. However, it may be unwise to label this meeting a non-event given the improving domestic conditions in the United States. Although markets expect no change in the Federal Reserve's policy settings, all eyes will be on the statement and press conference with Fed Chairman Jerome Powell.
Recent robust economic data from the United States may force the Fed to acknowledge the strengthening of the economy.
It must be kept in mind that the U.S. added 916,000 jobs in March while the gross domestic product (GDP) for Q1 is forecast to show a 6.7% increase quarter-on-quarter, according to Bloomberg estimates. If this optimism is reflected in the statement, it could fuel speculation over the central bank rolling back the extraordinary easing policies enforced to tackle the pandemic.
In regards to inflation, prices are rising across the economy with the annual inflation rate hitting 2.6% in March. Although this is greater than the Fed’s 2% target for 2021, the central bank has said it will tolerate higher inflation and does not think the economy will overheat. Such may lead to Powell defending the dovish stance of the Federal Reserve during his press conference. However, he will need to choose his words wisely. If Powell comes across as too optimistic over the economic outlook, this has the potential to awaken Fed hawks.
What does this mean for the Dollar?
If the Fed meeting ends up being a non-event with the policy statement and press conference striking a dovish tone, the Dollar is likely to weaken. As the central banks pledge to keep interest rates lower for longer continue to weigh on the Greenback, the Dollar Index (DXY) may descend lower. Looking at the technical picture, the DXY remains under pressure on the daily charts with prices trading around 90.78 as of writing. Sustained weakness below 91.05 could encourage a decline towards 90.00.
Alternatively, a hawkish surprise from the Fed could inject Dollar bulls with a renewed sense of confidence. Such an outcome may elevate prices back above 91.31 with 91.80 acting as the first level of interest.