March 16, 2022 9:36:18

The US Federal Reserve is expected to raise interest rates by 25bps at its meeting this evening. Soaring inflation should counter any uncertainty over the Ukraine crisis, with a first hike since 2018. The chances of a bigger 50bp move have been cut to around 10%.

The accompanying projections and dot plot are set to signal a series of further rate rises this year amid ramped up inflation forecasts but slightly lower growth estimates. This guidance is key in telling us if the Fed is moving towards more front-loaded hikes in line with the market pricing of six hikes this year. If the FOMC is more cautious, then the dollar should soften short-term and stock markets rise.

Whatever happens tonight, the Fed’s policy decision will still highlight the gulf in policy settings between it and the ECB. Euro gains depend squarely on peace talks and a de-escalation in fighting in Ukraine further down the line. But a more hawkish Fed and ongoing geopolitical tensions should offer support to the greenback.

EUR/USD still struggling around 1.10

We wrote last week how the euro remains the bellwether for risk sentiment and trend in commodity markets. While the latter’s surge has eased, the single currency is finding it tough to locate a decisive bid.

After its test of 1.08, the subsequent rebound has taken prices back into the long-term descending channel. Prices are trading around the first Fib level (23.6%) of this year’s high/low move at 1.0968. Buyers will need to retake 1.1069 and then the 1.11 barrier to suggest a firmer reversal is on the cards.

There is near-term support at 1.09 ahead of the year-to-date low at 1.0806. This is the final refence ahead of the March 2020 low at 1.0636.