t the Fed’s December meeting the latest ‘dot plot’, which shows where each member of the committee expects rates to be at the end of each year, showed that policymakers expected to hike on two occasions this year, compared to the four hikes from last year. Since then, however, the Fed has executed a sharp U-turn. FOMC Chair Jerome Powell has taken on a resoundingly more dovish tone of communications, citing weak domestic inflation and downside risks from abroad. The key to tonight’s meeting will therefore not be whether the Fed will revise lower its interest rate hike projections, but by how much.

We expect the bank’s projections to show that the median committee member does not expect to hike interest rates at all in 2019. This would also entail a lowering of its long term equilibrium rate forecast to around, or modestly above, current levels, putting the Fed’s projections much more in line with that of the market. With a downgrade to one hike expected by the majority of the market, such a sharp dovish turn could lead to a sell-off in the USD today.

Also of importance will be the bank’s latest growth and inflation projections. Macroeconomic news has been fairly mixed since the December meeting and there is a reasonable argument to suggest that a downward revision in growth forecasts could be on the horizon. This, combined with a downwardly revised dot plot, could help lift EUR/USD towards the 1.14 level today. The Fed’s policy announcement will take place at 6pm GMT, with Powell’s news conference to follow 30 minutes later.

Sterling falls as investors await Article 50 extension

By recent standards, volatility in the Pound was fairly limited yesterday, although Sterling did fall back towards the 1.32 mark against the US Dollar this morning.

With an extension to Article 50 all but guaranteed, investors are now turning their attention to the length of said delay. May is expected to ask the European Council for permission to extend A50 tomorrow. While her representatives have slammed rumours she will seek a long extension, a short extension through to the end of June is likely to be seen by the EU as insufficient in order to break the current impasse. As we have mentioned many times, a long delay would be better for GBP than a short one.

Meanwhile, activity in the Eurozone has been fairly limited this week, with the common currency driven largely by Brexit and Fed expectations. We instead look towards Friday’s preliminary Euro-area PMI number for signs of a pick-up in activity in the bloc.