Forex News

• AUD/USD ticks up to near 0.7115 as the Australian Dollar trades broadly firm.
• The US Dollar trades flat ahead of the Fed’s monetary policy announcement.
• Investors expect the Fed to leave interest rates unchanged.

The AUD/USD pair trades marginally higher to near 0.7115 during the European trading session on Wednesday. The Aussie pair is expected to trade broadly sideways as investors await the Federal Reserve’s (Fed) monetary policy outcome at 18:00 GMT.

According to the CME FedWatch tool, traders are confident that the Fed will leave interest rates unchanged in the current range of 3.50%-3.75%. This would be the second straight meeting in which the Fed will avoid any monetary policy adjustment.

Speculation that the Fed will hold borrowing rates steady has been intensified due to higher oil prices amid conflicts in the Middle East, which involve the United States (US), Israel, and Iran.

In the policy meeting, investors will also focus on the Fed’s dot plot, which shows policymakers’ collective forecast for the Federal Fund Rate in the near-to-long term.

The CME FedWatch tool shows that traders are unlikely to cut interest rates before the September policy meeting. Also, the odds of an interest rate cut in the same meeting are slightly over 50%.

Meanwhile, the Australian Dollar (AUD) trades broadly firm amid the expectation that the Reserve Bank of Australia (RBA) could raise interest rates further in the near term. On Tuesday, the RBA hiked its Official Cash Rate (OCR) by 25 basis points (bps) to 4.1%, and Governor Michele Bowman warned that price pressures could accelerate further amid ongoing Middle East tensions.

Earlier in the day, Australia’s Treasurer Jim Chalmers warned that the Iran war could add a further quarter of a percentage point to headline inflation.

Standard Chartered analysts Madhur Jha and Ethan Lester argue that sustained Oil price shocks have historically driven global inflation and often preceded global recessions. They highlight that a Brent move toward USD 135/bbl could shift market focus from inflation to growth risks. The authors stress that tighter central bank reactions to Oil shocks now add to downside growth concerns.

Oil shocks, inflation and growth risks

"Stagflation concerns following an oil shock have some basis in historical evidence. Since the 1970s, global inflation has been driven primarily by oil shocks (which have accounted for c.40% of global inflation variation, according to the World Bank’s analysis), with global inflation’s sensitivity to oil shocks on the rise since the pandemic."

"Moreover, since the 1950s, the global economy has witnessed five periods of recession (defined as a contraction in global real GDP per capita). Four of these recessions were preceded by a sharp rise in oil prices (barring the 2020 recession caused by the pandemic). While we do not see a particular oil price level associated with a recession, all previous recessions saw sharp oil price increases – at least a doubling."

"By our estimate, a move to USD 135/bbl for Brent oil price would be a level at which markets start to focus more on growth than inflation risks."

"While markets are right to worry about inflation risks currently, we are concerned about a pronounced growth impact given already-heightened global macro uncertainty and rising risks of asset market corrections related to private credit risks and AI valuations."

"Over the past two decades, central bank responses have moved from ‘looking through’ oil shocks to more proactive policies to keep inflation in check. This adds to downside growth risks. A shift in concerns to growth over inflation could focus attention on which economies have fiscal and monetary space to counter a slowdown."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)

• The US Federal Reserve is expected to leave the policy rate unchanged for the second consecutive meeting. 
• The Summary of Economic Projections will offer key insights into policy outlook as markets fear an inflation comeback due to the spike in energy prices.
• Fed Chair Powell’s comments could ramp up USD volatility as the Iran war has sharply reduced expectations for rate cuts this year.

The United States (US) Federal Reserve (Fed) announces its interest rate decision on Wednesday, a pivotal meeting for markets to gauge the stance of the world’s most important central bank after an energy shock that could put the Fed’s dual mandate in tension. While the main decision on interest rates is a given, the surge in Oil prices after the Iran war adds a layer of uncertainty that could turn this meeting into much more interesting – and more volatile for markets – than initially expected.

Markets widely expect the Federal Open Market Committee (FOMC) to keep the policy rate unchanged in the range of 3.5%-3.75% for the second consecutive meeting. 

As this decision is nearly fully priced in, the Summary of Economic Projections (SEP) and Fed Chair Jerome Powell’s comments in the post-meeting press conference could impact the US Dollar’s (USD) performance. 

The CME FedWatch Tool shows that investors see virtually no chance of a rate cut in either March or April, while pricing in more than 75% probability of another policy hold in June. Actually, markets currently expect only one interest-rate cut this year, a big change compared to the three cuts anticipated before the breakout of the war in Iran.

What changed? The Fed will be conducting its meeting under extraordinary circumstances as rising crude Oil prices, due to the closure of the Strait of Hormuz amid the ongoing war between the United States (US) and Iran, heighten the uncertainty surrounding the inflation outlook.

DBS Group economist Philip Wee argues that the Fed enters its March 17-18 meeting caught between surging energy-driven inflation and weakening US growth.

“Fed Chair Jerome Powell may still be haunted by the "behind the curve" spectre of 2022, when a delayed response to surging prices forced a painful, aggressive hiking cycle," Wee notes. This time, however, the Fed is currently confronting a fragile economy, he adds, citing the downward revision to the fourth-quarter Gross Domestic Product (GDP) growth and the 92,000 contraction recorded in Nonfarm Payrolls (NFP) in February. 

“The FOMC must determine whether these energy price spikes represent a primary inflationary threat requiring higher rates or a consumer tax necessitating cuts," Wee concludes.

When will the Fed announce its interest rate decision and how could it affect EUR/USD?

The Fed is scheduled to announce its interest rate decision and publish the monetary policy statement, alongside the SEP, at 18:00 GMT. This will be followed by Fed Chair Jerome Powell's press conference starting at 18:30 GMT. 

The rate decision itself is unlikely to trigger a significant market reaction, but investors will scrutinize the SEP and Fed Chair Powell’s tone.

The latest SEP, published in December, showed that the central bank’s projections implied a 25-basis-point (bps) rate cut in 2026, and another 25 bps reduction in 2027.

Additionally, Fed policymakers’ end-2026 projection for PCE inflation came down to 2.4% from 2.6% in September’s SEP. Given the recent rise in Oil prices, Fed officials are likely to point to higher inflation ahead. 

The CME FedWatch Tool points to about a 30% chance that the policy rate will remain unchanged at the range of 3.5%-3.75% at the end of the year. In case the dot plot highlights that a majority of policymakers prefer to hold the policy steady for the rest of 2026, in addition to an upward revision to the end-2026 PCE inflation projection, the USD could gather strength with the immediate reaction and weigh heavily on EUR/USD.

Conversely, the USD could come under bearish pressure and allow EUR/USD to gain traction if the SEP points to at least one 25 bps reduction in rates this year. 

Once markets digest the policy statement and the SEP, they will shift their focus to Powell’s presser, which will likely focus on fears about reviving inflation and his future at the Fed. 

If Powell hints that they will have to prioritize controlling inflation and inflation expectations because of rising Oil prices, this could reaffirm expectations for a steady policy rate for longer and support the USD. On the other hand, the USD is likely to lose interest in case Powell doesn’t hit the panic button, noting that they will need more time to assess how the US-Iran conflict could influence inflation dynamics and that they will need to be more attentive to labor market conditions and support growth after seeing the sharp decline in February’s NFP.

“Powell will carefully avoid giving any strong forward-looking signals and emphasize the two-sided nature of the risks stemming from the energy supply shock,” said Danske Bank Research Team. 

“Most FOMC participants still see the current policy rate level somewhat above neutral, and once the energy uncertainty eases, we expect the Fed to eventually deliver two more rate cuts in June and September,” they add. “Extending uncertainty could push the expected cuts further out into the future but not erase them completely, which we expect to be reflected also in the updated dots,” the analysts conclude.

Eren Sengezer, European Session Lead Analyst at FXStreet, provides a short-term technical outlook for EUR/USD:

“The near-term technical outlook points to a buildup in bearish pressure. The 20-day Simple Moving Average completed a bearish cross with the 50-day SMA and recently dropped below the 100-day and 200-day SMAs. Additionally, the Relative Strength Index (RSI) indicator stays below 40 after recovering slightly from the oversold region below 30.”

“On the downside, 1.1380 (Fibonacci 38.2% retracement level of the 2025-2026 uptrend) aligns as a key support level ahead of 1.1170 (Fibonacci 50% retracement). In case EUR/USD reaches the 1.1660-1.1700 region, where the Fibonacci 23.6% retracement, the 100-day SMA and the 200-day SMA form a strong resistance, technical buyers could take action. In this scenario, 1.1900 (round level, static level) could be seen as the next technical hurdle.”

• The Bank of Canada is expected to keep its interest rate at 2.25%.
• The Canadian Dollar remains weak, with USD/CAD above 1.3700.
• Markets pencil in around 10 bps of hiking by the BoC this year.

The Bank of Canada (BoC) is widely expected to keep its policy rate unchanged at 2.25% at its Wednesday meeting, effectively extending the pause it signalled back in January.

At that meeting, policymakers did exactly that, leaving the policy rate at 2.25%, broadly in line with market expectations. The decision reinforced the bank’s cautious, wait-and-see approach as officials continue to navigate a rather uncertain global backdrop amid the US-Iran war and the Oil supply disruptions through the Strait of Hormuz.

While higher crude prices could add to inflation risks, Canada is also a major Oil exporter, meaning stronger energy prices may support economic growth.

The updated projections also paint a somewhat softer picture for the economy. The economy is still projected to expand, with GDP rising by roughly 1.1% anticipated for 2026. However, the trajectory of that growth appears less robust.

In fact, the bank now sees activity losing momentum toward the end of the forecast horizon, with growth expected to be flat in the fourth quarter.

The inflation picture is looking a bit brighter, as the Consumer Price Index (CPI) is projected to average roughly 2% this year. Furthermore, this slight dip indicates that inflationary pressures are moving toward the bank's target.

In addition, policymakers kept their estimate of the neutral rate unchanged in the 2.25%-3.25% range.

In his previous press conference, Governor Tiff Macklem cautioned that the changes to US tariffs might be permanent, even hinting that the period of unrestricted, rules-based trade between Canada and the US could be over.

Overall, the BoC’s message is clear: officials appear satisfied with maintaining interest rates at their current levels, at least for now, while closely monitoring the economy's slower growth and the unpredictable global situation.

Inflation, however, remains the key watch point after the headline CPI edged up to 1.8% YoY in February, falling below the bank’s target for the first time since August 2025. In the same direction, the core inflation eased to 2.3% from a year earlier. The bank’s preferred measures, CPI-Common, Trimmed and Median, also ticked lower, but at 2.4%, 2.3% and 2.3%, respectively, they remain comfortably above target.

Previewing the BoC’s interest rate decision, strategists Molly Schwartz and Christian Lawrence at Rabobank noted, “We expect the Bank of Canada to maintain the overnight policy rate at 2.25% through year-end; however, the market is starting to price the possibility of a hike into the OIS curve.”

When will the BoC release its monetary policy decision, and how could it affect USD/CAD?

The Bank of Canada will announce its policy decision on Wednesday at 13:45 GMT, followed by a press conference with Governor Tiff Macklem at 14:30 GMT.

Markets anticipate the central bank to maintain its current stance, with a projected tightening of approximately 42 basis points by the end of 2026.

Pablo Piovano, Senior Analyst at FXStreet, points out that the Canadian Dollar (CAD) has been depreciating steadily against the Greenback since its monthly troughs in the low 1.3500s, finding some decent resistance around 1.3750 in the last few days.

Piovano says a return of a more convincing bullish momentum could prompt spot to initially reclaim the March top at 1.3752 (March 3), ahead of its key 200-day SMA at 1.3798 and the 2026 ceiling at 1.3928 (January 16). Up from here comes the key 1.4000 threshold, seconded by the November top at 1.4140 (November 5).

On the downside, he adds, "The loss of the March base at 1.3525 (March 9) could put a test of the February valley at 1.3504 (February 11) back into view ahead of the 2026 bottom at 1.3481 (January 30).

“Momentum favours extra gains,” he suggests, noting that the Relative Strength Index (RSI) hovers near the 54 level, although the Average Directional Index (ADX) around 14 is indicative of a pale trend.

ING strategist Francesco Pesole argues that a hawkish revision of the Federal Reserve Dot Plot could support the Dollar, with markets already pricing limited cuts. Pesole sees the Dollar’s recent weakness as positioning rather than geopolitics and expect only a short-lived positive Dollar reaction as oil-driven headlines continue to dominate.

Fed reassessment seen backing Dollar

"The dollar’s slip yesterday appeared more a symptom of position squaring ahead of today’s FOMC risk event rather than a signal of further optimism on geopolitics."

"The Fed will keep rates on hold, but the risks are clearly of a hawkish revision in the Dot Plot projections, with the median currently signalling one rate cut by year-end. That matches current market pricing (-27bp for December), and the dollar should benefit from a revision to no cuts in 2026."

"We see a high risk that the Fed will revise its median Dot Plot to signal the next cut only in 2027. That could influence markets in a meeting where caution could be the name of the game, given the highly volatile situation. We see upside risks for the dollar."

"Markets will need to read into new projections to infer some policy response framework, but we think rate expectations will remain fluid and tied to oil market swings even after this Fed meeting. Accordingly, we expect a positive, but short-lived response by the dollar, with geopolitical headlines quickly back in the driver’s seat."

"In terms of dovish risks, reintroducing “downside risks” mentioned in the statement’s section about jobs could help markets maintain expectations for a cut on a dual-mandate rationale."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)