FXS Fed Sentiment Index drops to neutral territory as blackout period starts

The Federal Reserve (Fed) will conduct its two-day monetary policy meeting next week and announce its decisions on March 19. Until then, the Fed will be in the blackout period, during which policymakers and officials will not be allowed to comment on the policy outlook.

According to the CME FedWatch Tool, markets virtually see no chance of a 25 basis points (bps) rate cut next week. The probability of a rate reduction in May currently stands at around 40%.

In the meantime, FXStreet (FXS) Fed Sentiment Index stays in the neutral territory, slightly below 100. Following the January meeting, the Fed left policy settings unchanged, as widely anticipated. The policy statement, however, adopted a cautious tone regarding further policy easing in the near future, citing the uncertainty surrounding the impact of policy changes. In turn, the FXS Fed Sentiment Index climbed above 120.

Comments from Fed officials following the January meeting, however, caused the FXS Fed Sentiment Index to turn south. 

In his last public appearance before the beginning of the blackout period, Fed Chairman Jerome Powell noted that the policy is not on a preset course. "We can maintain policy restraint for longer if inflation progress stalls or ease if labor market unexpectedly weakens or inflation falls more than expected," Powell noted. On a more dovish note, San Francisco Fed President Mary Daly said that the elevated uncertainty about the economy and policies could weigh on demand. She further argued that they should be careful and deliberate with monetary policy.

Meanwhile, the US Dollar (USD) has been struggling to stay resilient against its rivals. Disappointing macroeconomic data releases, combined with US President Donald Trump's tariffs, revived fears over an economic downturn in the US and weighed heavily on the USD. The USD Index, which tracks the USD's performance against a basket of six major currencies, was last seen losing about 3.5% since the beginning of March, after falling nearly 1% in February.