Joining up the dots ahead of the FOMC

A quick trading preview of Wednesday’s US Fed FOMC meeting

Tomorrow’s meeting is pretty straightforward. No policy change is expected, and the dots are expected to shift to indicate a change in the median to two or even one cut this year.

The risks are pretty simple to gauge around the dots. Two dots might disappoint market hawks, one dot might be too much for the doves. One risk that isn’t being discussed much is that one or two stray dots indicate another hike.  There’s a few candidates who might take their dots for a walk, among them Bowman, Kash’n’Kari and maybe Mester. That’s would be a bit of an outlier but we traders should always try and discern all the risks that may appear.

Here are the dots from the March projections.

With the market once again looking a touch more hawkish after the NFP report, we may be setting up for a disappointment if Powell pulls the rug out from under that short-term sentiment. In theory, the message doesn’t really need to change. There’s enough yellow flags being waved in different parts of different sectors of the economy that the Fed have highlighted and are ready for, so there’s no real need for Powell to go stronger than the ‘higher for longer’ message, even on hotter data. But, if we do see a dot or two going for hikes, that would be a small hawkish tilt from some members.

The market will likely make its final adjustments to Fed exps over the CPI data, which might even be bigger than the Fed after. Expectations for that is for headline CPI to come in unchanged at 3.4% (which would make it 12 months of CPI going sideways above 3%), and the core to drop to 3.5% vs 3.6% pr. That would continue the trend lower since the 6.6% high back in Sep 2022. While the Fed may like the PCE as their preferred measure, we’re not getting that tomorrow, we’re getting CPI, so that’s what the market will move on. Any hotter than expected number will likely set the market on fire and we’ll be on a very hawkish footing going in, which will mean the bigger price risk is a non-hawkish outcome. And, vice versa if CPI is down a good chunk. As always, the propeller heads will be looking at housing, shelters, supercores and anything else that fits whatever narrative but for us traders, we’ll just go with the initial data and then read about the rest later.

Trading wise, for the CPI, be careful of the volatility around the reaction and make sure you know which way the market is leaning after that and going into the FOMC. If you know what’s happening going in, you should know how to react coming out.

For the Fed, USD is stilll wandering between well walked ranges and those ranges should be the focal point for plotting any trades. Unless we get anything shocking, those ranges should hold.  That might be something like 1.07-1.08 on the narrow for EURUSD and 1.06-1.09 wider. So, do your chart homework ahead of the events, and know where you would like to trade before/during/after, and make sure your risk is well manged and under control.

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