FOMC Risk Is Skewed USD Bullish; Could Trigger EUR/USD Decline Into 1.20

The Federal Reserve is set to raise interest rates and also hint of the next moves. What is priced in? What does it mean for EUR/USD?

Here is their view, courtesy of eFXnews:

Bank of America Merrill Lynch Research discusses the USD outlook around the FOMC meeting on Wednesday and flags upside risk for the USD.

“The FOMC is expected to hike 25bp. We expect the dots to show a higher path of rates, including a slight move up in the LR. We expect the 2018 dot to hold at 3 hikes but for 2019 to shift from 2 to 3 hikes,” BofAML projects. 

“Event risk at this week’s March FOMC meeting is skewed USD bullish, in our view. Although the market is fully pricing in a 25bp hike, the dollar could be pushed higher as a result of revisions to the Fed’s projections, in particular a potential increase in 2020 and longer-run dot projections. A rise in the dot plot impacts the dollar via the interest-rate expectations channel, which has been an important driver of FX returns this year.

Hypothetical monetary policy-driven scenarios for FX are worth considering. If the rates market either priced in four hikes in 2018 or priced the Fed consistent with the 2019 median dot, we think EURUSD would test the 1.20 level fairly quickly,” BofAML argues.