Markets are expecting a 25bp rate hike from the Fed today and indications in Dot Plot for an additional rate increase of 90-100 bp this year. Forecasts of a higher terminal rate this year should be a positive surprise for the dollar. The degree of concern about the conflict in Ukraine and its economic implications is also a very important element of today's Fed communication, since the level of investor confidence in the Fed forecasts will depend on this. Markets will also pay much attention today to the release of Canada inflation report for February, which will likely impact BoC’s decision at the upcoming meeting.

Statements by Ukrainian and Russian officials characterizing the progress of the negotiations point to a de-escalation, which is causing a pullback of recent movements in gold, oil, USD, as well as sovereign debt yields. One of the clearest examples was the statement by Ukrainian President Zelensky that the country would not be able to join NATO. The dollar, which has been fueled by geopolitical tensions all this time, is retreating, European currencies have accordingly acquired a growth driver. The Chinese Central Bank unexpectedly interrupted weakening of the yuan, which has been propping up UD demand, in addition, the announcement of Saudi Arabia that it is considering the possibility of accepting payment for oil supplies to China in yuan was unpleasant news for the US currency. After all, the long-term demand for the dollar is based, among other things, on the concept of the so-called "petrodollars".

Markets have little doubt that the Fed will raise rates by 25 bp today – chances of an increase by 50 bp. estimated at 10%. Technical policy adjustments such as reverse repo and banks' excess reserves rate changes will also be scrutinized by investors.

The main market reaction will depend on the published economic forecasts, as well as Dot Plot - the aggregate opinion of officials about how the rate will change this year, in the medium and long term.

The base case is an indication in Dot Plot that the interest rate will be increased by another 90 bp this year. However, the combination of a higher inflation outlook and lower GDP growth (i.e., stagflationary outlook) may suggest that the Fed will be limited in actively raising rates, and in this case the risk of a negative reaction to the dollar will be high.

However, in the medium term, the chances that the Fed meeting will be more positive for real rate growth in the US than the last ECB meeting for real rate growth in the EU are higher. Restoring trade links and addressing disruptions in EU supply chains is a medium-term factor that will have a negative impact on the EU economy, curb growth, fuel resilience of inflation and its broad impact. The US is now less exposed to these risks, which leads to a more favorable forecast for real rate growth.

EURUSD found a balance near the level of 1.10 ahead of the Fed meeting, the pair has been forming a characteristic triangle for a week, which usually precedes a breakout movement. If the Fed does take a decisive step forward today, investors will most likely be inclined to search yield in the US financial market for some time, which will put pressure on EURUSD. Based on these considerations, a downward exit from the triangle is a more likely scenario: