What to expect from the Fed on the 1st of February? The Fed should be about to pivot and it seems to be a question of ‘when’ and not ‘if’. In the last dot plot, the Federal Reserve stated that there would be no rate cuts in all of 2023. Note December’s dot plot here:

The Fed hiked by 50bps as expected in December and Powell repeated in the press conference the need to get tough on inflation to reinforce the dot plot’s message. However, the bond market did not reflect the messaging from the Fed last December and that mismatch between market expectations and the Dot Plot has continued. Look at the Financial Source STIR market curve which shows the market’s expectations of two rate cuts this year in the second half of 2023.

Why STIR markets are right

This is because the reason for the Fed’s tough message was due to rising inflation. Inflation is now showing another month of falls looking at the latest US CPI print the clear stepping lower pattern has remained.

So, it is reasonable to expect the Fed to recognise this at some stage and a pivot is probable.

The argument against a Fed pivot

Of course, the other way of looking at the data is to say, yes, inflation has fallen, but it is still way above the Fed’s target of 2%. Therefore, the Fed may still maintain its ‘no rate cut’ in 2023 stance.

The key level to note on the EURUSD

This major weekly trend line is a key level for the USD. If the Fed starts to look like pivoting then the EURUSD should surge higher over this level. Risk can be very nicely defined as the price would be expected to move one side of this level as it is a natural ‘technical line in the sand’. It’s the major level to watch on the EURUSD right now.