The Fed’s Stance on Interest Rates to Depend on CPI Figures

As the first week of March ends, investors will start to position themselves and plan for new monetary policy changes. The Federal Reserve is expected to confirm its rate decision on March 22nd alongside the Fed’s economic projections and the president’s press conference. These events will very likely influence both the US Dollar and US Indices. Investors will mainly be focused on how much the Fed will choose to hike interest rates. 

One of the most recent indications of the Federal Reserve’s stance is Mr. Waller’s interview last night. Governor Christopher Waller, a member of the Open Market Committee, advised that the bank’s stance on interest rates will depend on the next Consumer Price Index and less on the NFP figures. Mr. Waller confirms the Fed will need to see a “significant” decline in CPI figures not to increase the interest rate target. 

The Governor did not mention how much he would consider “significant,” but most analysts have speculated a figure of at least -0.2% would be required. Though most economists believe it is unlikely inflation will decline to this level. The CPI and PPI figures will determine if the Fed increases interest rates by 0.50% and how high their interest rate targets will be. 

EUR/USD

The US Dollar Index increased above the 105.00 markets but could not establish itself above this level. The index quickly declined back below and has also slightly declined this morning. However, the index remains higher than the price ranges in early February. The EUR/USD declined during yesterday’s sessions but did not form a full correction. This morning the price has slightly increased, but investors are monitoring if the price will again point downwards, forming a lower swing high. A lower swing high may signal a possible downward trend. 

This morning the exchange rate has increased by 0.17%, but moving averages are yet to indicate upward price movement. On the 1-hour chart, the moving averages have crossed upwards, but the 25-day SMA continues to move downward. Therefore the price movement may be a retracement. Price action will give a bearish signal if the price manages to break through the 1.06010 support level. 

EUR/USD 3-Hour Chart on March 3rd 

The difficulty with the EUR/USD is that investors expect both central banks to increase interest rates and maintain a hawkish stance until the summer. Yesterday’s President of the ECB advised that she still believes the Eurozone can avoid a recession even if interest rates significantly increase. BNP Bank has been the latest to speak about the ECB’s interest rates. According to BNP Bank, the ECB may increase interest rates up to 4% before the summer months. 

In the US, there are currently no signals from economic data that the US is experiencing any economic slowdown. Therefore economists believe the Fed will also take a similar approach. The latest data from the US labour market turned out to be stronger than expected. The number of applications for unemployment benefits increased by 190,000, less than the forecast of 195,000 and the previous figure of 192,000. The total number of individuals claiming benefits has declined over the past week by 5,000. 

This afternoon investors will be monitoring the ISM Purchasing Managers’ Index, which is expected to decline from 55.2 to 54.5. A higher figure can support the US Dollar. 

NASDAQ

The NASDAQ had increased by 0.74% during yesterday’s trading session, and the instrument is also climbing this morning. However, many economists advise that growth will be limited while the Fed keeps hiking rates. Higher interest rates reduce consumer demand and investor confidence. Additionally, ultra-high interest rates also decrease the chances of experiencing a “soft landing”. 

When looking at technical analysis, the asset is increasing close to the previous resistance levels between $12,114 and $12,162. Currently, technical analysis is signaling a bullish trend on the NASDAQ. Still, as previously mentioned, traders need to monitor how the asset reacts to the previous resistance level and if the price becomes overbought on the Relative Strength Index. 

NASDAQ 1-Hour Chart on March 3rd

This afternoon’s ISM Purchasing Managers’ Index will also influence the NASDAQ. A higher-than-expected figure signals positive economic conditions and pushes the Fed to become stricter.

Summary:

• FOMC members confirm the rate decision will depend on this month’s CPI figures. According to Governor Waller, the CPI figure will need to decline significantly. 
• Governor Waller confirms that if the CPI figure is unsatisfactory, the committee will opt for a higher terminal rate. 
• The European Central Bank and Federal Reserve are expected to be more restrictive about inflation and demand. 
• The NASDAQ has climbed over the past 24 hours, but analysts believe growth will be a limited hike in central banks' increased interest rates.