FX.co ★ Market Consolidation Ahead of the Fed's Rate Decision: EUR/USD Could Rise While USD/CAD Declines

A large number of market participants appear to consider the possibility of a Fed surprise in the form of an unexpected interest rate hike. This is contributing to their cautious stance, reflected in the consolidation of asset prices.

Today, Tuesday, market consolidation that began on Monday is continuing. Markets expect the Federal Reserve to leave its key interest rate unchanged. In any case, federal funds rate futures indicate a 90% probability of this outcome. However, some market participants believe that the regulator may unexpectedly raise interest rates in response to the latest inflation data. This is most likely the main factor restraining both a decline in the US dollar and demand for US Treasury securities and corporate stocks.

Could There Really Be a Surprise?

It seems possible. However, much will depend on various factors.

The first factor is political. Elections to the House of Representatives and the Senate will take place on November 3. The Fed is unlikely to take a decision that could unsettle the markets under these circumstances. On the other hand, Kevin Warsh spoke last week and indicated that he did not intend to vote for an interest rate hike this month. He justified this position by stating that it was necessary to wait and assess how inflation develops as crude oil prices stabilize.

The only significant argument in favor of an interest rate hike is rising inflation, or more precisely, its acceleration, which already provided grounds for raising rates in September. However, it is difficult to say definitively whether the Fed will make such a decision in the current circumstances. This uncertainty is contributing to market caution.

Now, consider the current market outlook. Despite the existing uncertainty, the Federal Reserve is likely to keep interest rates unchanged. One reason is that the Personal Consumption Expenditures (PCE) price index will be released on Thursday, the day after the Fed's monetary policy decision. Although the indicator is forecast to show an increase, the Fed under Kevin Warsh may still leave rates unchanged. At the same time, the Fed Chair could leave the door open to an interest rate hike at the December meeting during the press conference. This scenario could lead to only a limited weakening of the US dollar.

What Can Be Expected in the Markets Today?

The lack of a clear outlook ahead of the Fed's decision is likely to contribute to continued consolidation across the markets until the outcome of the meeting is announced.

Daily Forecast

EUR/USD

The pair is trading at the 1.1155 support level. A break below this level could lead to a decline toward 1.1112, followed by a possible upward correction toward 1.1252 in response to the Fed's interest rate decision. The 1.1124 level could serve as a potential entry point for buying. A stop-loss could be placed at 1.1095.

USD/CAD

The pair is trading above the 1.4000 support level. A break below this level could lead to a decline toward 1.3934. The 1.3994 level could serve as a potential entry point for selling. A stop-loss could be placed at 1.4056.