Fed Preview: Three scenarios and their implications for EUR/USD and USD/JPY – TDS
22.03.2023, 15:22

Fed Preview: Three scenarios and their 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 (20%)

“The FOMC delivers a 25 bps rate hike, but separates ongoing liquidity strains in the banking system and its dual mandate of full-employment and on-target inflation, with the latter still significantly out of sync. Chair Powell signals that more interest-rate increases are in the pipeline. The median dot for 2023 rises. USD/JPY 133.90/00, EUR/USD 1.0680/00.”

Base Case (55%)

“Fed delivers a 25 bps rate hike, acknowledging recent financial-market turmoil has raised uncertainty about the outlook. However, the Committee signals that the job is not done yet, as inflation remains overly elevated. We expect the chairman to reiterate that, while the FOMC will remain ever more data-dependent, it judges that ongoing rate increases might still be appropriate. USD/JPY 132.70/80, EUR/USD 1.08.”

Dovish (25%)

“Fed pauses rate increases, and flags rising uncertainty in the path forward for policy. The Committee notes that recent market turmoil is likely to adversely impact financial conditions and curtail lending in the medium term even if there's no broad contagion in the banking system. Powell mentions that the best course forward is to be patient given the ongoing headwinds facing the economy. The median dot for 2023 is lowered, with the chairman also reiterating the Fed's desire for a soft landing. USD/JPY 130.60, EUR/USD 1.0880.”

 

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