Fed Preview: Three scenarios and its implications for EUR/USD and USD/JPY – TDS
01.02.2023, 13:19

Fed Preview: Three scenarios and its implications for EUR/USD and USD/JPY – TDS

Economists at TD Securities discuss the Federal Reserve interest rate decision and its implications for EUR/USD and USD/JPY.

Hawkish (25%)

“The FOMC delivers a 25 bps rate hike but downplays the recent decline in core prices as services inflation remains elevated and the labor market is still hot. Chair Powell calls the recent easing of financial conditions inappropriate and suggests that the Fed may need to increase rates above current market pricing to bring inflation under control. USD/JPY 130.80/00, EUR/USD 1.0730.”

Base Case (60%)

“Fed delivers a 25 bps rate hike, acknowledging the recent progress on inflation as a key factor for moderating the pace of hikes. The Committee reiterates that the job is not done, however, as the labor market remains overly tight. Powell maintains a similar tone to his post-December FOMC remarks, suggesting that ‘ongoing increases in the target range will be appropriate’, leaving the door open to additional hikes. USD/JPY 130.40, EUR/USD 1.0790/1.0800.”

Dovish (15%)

“Fed delivers a 25 bps rate hike, but flags recent deterioration in activity data, along with slowing inflation and wage growth as evidence that policy is working as intended with the full impact from prior hikes yet to be felt. Powell suggests that inflation could continue softening without a meaningful deterioration in the jobs market. Powell hints at being closer to reaching terminal and reiterates the Fed's desire for a soft landing. USD/JPY 128.90, EUR/USD 1.10.”

See – Fed Preview: Forecasts from 16 major banks, dialing down rate hike to 25 bps

 

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