The Fed kept the interest rate range unchanged at 4.25%-4.5% in the March meeting and decided to slow down the pace of balance sheet reduction from April 1. The meeting statement pointed out that the uncertainty of the economic outlook is increasing, which is the biggest difference from the previous meeting.

In the economic outlook, the economic growth forecast for 2025-2027 was lowered, and the inflation forecast for 2025 was raised, but the dot plot showed that the Fed kept the forecast of two interest rate cuts this year (to the range of 3.75%-4%) unchanged. The implication is that the slowdown in economic growth will offset the inflation risk brought by tariffs to a certain extent, so there is no basis for (rapid) interest rate cuts before the prospects of the tariff war are clear.

However, from the distribution of votes, the number of votes in favor of slowing down interest rate hikes (hawks) increased from 4 to 8, while the number of votes in favor of faster interest rate cuts (dovish) decreased from 5 to 2, which means that for most Fed members, although the CPI in February was lower than expected, high inflation is still the primary risk at present and for some time to come. It is worth noting that the committee members did not raise their inflation forecasts for 2026-2027, which may send a signal that “inflation is only temporary.”

The bets in the interest rate market (white line in the figure below) are basically consistent with the Federal Reserve (green line), with an implied probability of a rate cut in June of 56%, and two rate cuts are expected throughout the year.

Fed dot plot Source: Bloomberg

The US dollar index closed slightly higher on Wednesday after the Fed’s decision was announced, but the index still hovered at a 5-month low. If Trump’s “reciprocal tariffs” are implemented as scheduled, it will not only drag down the US and global economies, but also accelerate the process of “de-dollarization” in various countries. On the other side of the coin is the strong demand for gold, with gold prices hitting a record high of $3,047 overnight. Gold prices are currently bullish in different time periods.

XAUUSD 1 hour Source: Tradingview

Euro’s “revaluation”

At the beginning of the year, the market’s expectations for the euro were still down to parity, but in less than three months, the euro has stood at 1.0900 and is expected to continue to hit the 1.1000 mark.

On the one hand, the weak dollar has indirectly increased the attractiveness of the euro. But more importantly, European countries, including Germany, have expressed their intention to turn to fiscal expansion to stimulate the economy and strengthen national defense, and the market has given positive feedback. Active fiscal policies may reduce the need for the European Central Bank to cut interest rates sharply, and will also increase the scale of debt and thus increase the yields of European countries’ government bonds. Taking the United States and Germany as an example, the bond yield spread between the two countries has dropped from 2.2% to 1.4%, which is the main reason for the rise of the euro.

However, as the euro approaches key resistance (the downward trend line starting in 2021, which is around 1.1070), and the US trade war with Europe deepens, euro bulls still face considerable challenges.

US-German 10-year Treasury bond spread vs EURUSD Source: Tradingview

The Bank of Japan is under great pressure to raise interest rates

The Bank of Japan kept its policy rate unchanged at 0.5% at its meeting on Wednesday and expected inflation to continue to rise. Governor Kazuo Ueda also pointed out the high uncertainty caused by tariff issues at the press conference.

Japan’s wage growth hit a record high in more than 30 years, and the inflation rate rebounded to 4% for three consecutive months (the latest data will be released this Friday). This year’s “Spring Fight” results showed that companies promised to increase wages by 5.46%, which is higher than last year’s 5.28%, setting a new record for the largest wage increase in more than 30 years.

Continued wage increases are the main driver of inflation, which puts great pressure on the Bank of Japan. The market expects the next rate hike to be in the third quarter, and the terminal interest rate may rise to 1.5-2%.

Japan’s 10-year government bond yield broke through 1.50%, a record high since 2008, which led to a rapid narrowing of the US-Japan interest rate gap, but recent speeches by central bank officials revealed the view that they would not intervene in the bond market, which may help the yen continue to strengthen.

After repeated attempts to break through the 149-150 area, USD/JPY may continue to move downward to 145 to seek support.

USDJPY Daily Chart Source: Tradingview

The Bank of England will be on stage tonight

The Bank of England will announce its interest rate decision on Thursday evening and is expected to remain unchanged.

In the February meeting, the central bank voted 7-2 to cut interest rates by 25 basis points, of which 2 voted in favor of a 50 basis point cut. Once the dovish voices in this voting committee are reduced or even disappear, it is expected to stimulate the pound to continue to rise above 1.3000.

In addition, central banks such as Switzerland, Sweden, Turkey, South Africa, Turkey, and Russia will also announce interest rate decisions in succession today and tomorrow.