This week, all eyes are on the upcoming FOMC meeting, where market participants eagerly await any signals from the Federal Reserve about its next move on interest rates. With recent U.S. economic data showing mixed signals and global trade uncertainty rising, the Fed faces a tough balancing act — making the path of future rate changes harder to predict.
The U.S. economy contracted at an annualized rate of 0.3% in Q1, primarily due to a front-loading of imports by businesses and consumers ahead of potential new tariffs. This surge in imports dragged down the GDP figures. However, the labor market remains surprisingly resilient. April’s strong job numbers and steady unemployment rate suggest underlying demand for labor is still solid, offering some reassurance to the Fed.
On the inflation front, markets are closely watching the core PCE index — the Fed’s preferred gauge. While the latest data shows some softening in price growth, inflation remains above the Fed’s long-term target. Adding to concerns, former President Trump has proposed a new round of high tariffs, which could drive up import prices again and put renewed pressure on inflation.
Most traders expect the Fed to hold rates steady at the May meeting. However, there’s growing debate over whether the Fed will begin cutting rates as early as July — current market pricing estimates a 60% chance of a rate cut. Fed Chair Jerome Powell’s post-meeting press conference is likely to be a key guide for how monetary policy might evolve in the second half of the year.
Meanwhile, currency markets are also showing signs of volatility amid policy uncertainty. For the euro-dollar pair, the 1.1345 level remains a strong resistance point. If the Fed maintains a hawkish stance, the euro could slip further, potentially testing 1.1250 or even 1.1111 — especially as demand for the U.S. dollar rises in risk-off environments.
As for USD/JPY, the pair is currently consolidating around the 144 level. With the Fed and the Bank of Japan heading in opposite policy directions, there’s potential for the dollar to move higher. If the Fed delays rate cuts while Japan maintains an ultra-loose policy, we could first see a dip toward 142.75, but the medium-term view still points to a possible test of 145.85 or higher.
In short, the Fed is walking a tightrope, trying to manage inflation risks tied to tariff policy while staying mindful of slowing economic growth. Every word coming out of this week’s FOMC meeting — especially from Powell — could swing markets. Investors should stay alert and be ready to pivot their strategies based on the tone and guidance of the Fed’s policy update.
