Federal Reserve Faces Conundrum as Markets Anticipate Status Quo in January Policy Meeting

The USD Index (DXY) is currently undergoing a consolidative phase, hovering around the 103.50 zone, which aligns with the pivotal 200-day Simple Moving Average (SMA). Despite the recent bullish trend that emerged at the beginning of the new year, there are indications of a potential slowdown, evident as the price endeavors to undergo multiple tests of the lower boundary within this corridor:Potential upward momentum may target the 100-day SMA at 104.30, while a decline could find support around the December 2023 low below 101 points. As the Federal Reserve gears up to unveil its initial monetary policy decision for 2024 this Wednesday, market participants are preparing for a sense of continuity. The prevailing consensus hints at the likelihood of the Federal Open Market Committee (FOMC) maintaining the Fed Funds Target Range within the existing 5.25%–5.50%. This sets the stage for the central bank to sustain interest rates at their highest level in more than two decades for the fourth consecutive meeting. During his recent post-FOMC press conference, Federal Reserve Chair Jerome Powell chose not to provide explicit guidance on the timing and pace of potential rate cuts. Powell stressed the significance of implementing rate cuts well before annual inflation rates reach the 2% target, expressing apprehensions about the adverse consequences of delayed policy adjustments. However, the challenge lies in gauging the duration of the necessary restrictive policy and determining the opportune time for initiating cuts. Recent robust fundamentals in the United States have heightened the likelihood of a “goldilocks” scenario in which the Fed manages to bring down inflation to the 2% target without triggering a recession. Powell is expected to maintain a cautious tone, underscoring that there is work yet to be done concerning inflation. The Fed's data-dependent stance is poised to remain steadfast, underscoring the central bank's commitment to closely monitoring economic developments. The December Summary of Economic Projections unveiled a shift in rate expectations among FOMC members. The median member now envisions a total of 75 basis points in interest rate cuts for 2024, reflecting a 25 basis point increase from the projections made in September. The "dot plot" outlines a projection of four additional interest rate cuts in 2025 and three more reductions in 2026, aligning with a long-term outlook. Since initiating tightening measures in 2022, the Federal Reserve has executed a cumulative increase of 525 basis points in interest rates and has divested securities totaling $1 trillion from its balance sheet. Powell recognizes that the complete effects of these measures are still unfolding, introducing intricacies to the evaluation of the necessary duration of restrictive policies. The potential ramifications for economic growth continue to be a pivotal concern for the central bank. EUR/USD has faced downward pressure in the initial days of the new trading year, experiencing a decline of more than three cents since late December. A breach of the 2024 low around 1.08 could potentially unveil additional weakness, extending towards the December low at 1.0720. On a positive note, surpassing the 55-day Simple Moving Average (SMA) at 1.0910 is a necessary condition. Subsequently, breaking through the psychological barrier of 1.1000 would be a crucial step to redirect attention towards the December high, situated near 1.1140. Near-term risks on the pair, however, are skewed towards downside till the price reaches a more crucial area of support, for example, 1.0720 (the December low):