No change is expected in the monetary policy regarding interest rates and the Q.E. that maintains its unlimited asset purchase rate.
However, the Fed's MPC Meeting is crucial. It could provide a growth forecast for the economy, a potential forecast on changes in interest rates and insights into possible rises in interest rates for long-term bonds.
The economic forecasts are expected to be somewhat more positive than in the previous meeting due to the rapid administration of vaccines and mainly due to the approval of the fiscal stimulus package that led to massive injection to the North American economy.
As for interest rate hikes, we could see some Federal Reserve members advancing the dates of interest rate hikes for 2023. Remember that on previous occasions, they did not think interest rates required hikes at least until 2024.
This could be interpreted in the market as a change towards a more "hawkish" bias, but it will depend on how many Fed members decide to step forward. Potential hawkish bias may positively impact the U.S. Dollar, a currency that somehow already anticipates a change in bias mainly motivated by increases in long-term interest rates.
In this sense, and if this were to happen, EUR/USD, which traded around 1.1900 in the last two days, could resume its downward path where it would technically find its first support at the 1.1850 area.
But Powell's speech will undoubtedly be the markets’ main attraction. Suppose the Fed chairman shows concern about rising long-term bond interest rates and manifests a clear intention to avoid that from happening by implementing measures to control the yield curve. In that case, there could be a downward movement in yields that would negatively affect the dollar's price, especially against the yen. USD/JPY has reached highs in the 109.36 area and is in an overbought zone on the daily chart, with an RSI at the levels of 80 and threatening a bearish divergence.
On the other hand, if Powell isn’t worried about the current evolution of long-term interest rates and does not show any intention to avoid it, the treasury bonds' yields could continue to rise, potentially hitting the 2% mark in the case of the 10-year bond. This would lead to upward pressure from the U.S. Dollar that would resume its upward movement that began in January.
Sources: Bloomberg, Investing.com.