When is the Fed interest rate decision and how could it affect DXY?

The Federal Reserve will announce its decision at 19:00 GMT. At the same time, the Summary of Economic Projections projections of FOMC officials will be released, including the “dot plot”. Jerome Powell will hold a press conference at 19:30 GMT. 

Key notes

A 25bp rate hike to 2.25-2.50% is widely expected today; it would be the fourth rate hike of the year. Markets have already discounted a hike. Market participants will likely look for signals about the future path of monetary policy in the statement, the projections and Powell’s press conference. 

It is probably one of the meetings of the year with most expectations. Fears about an economic slowdown in 2019 pushed back rate hike expectations for next year, so the key will be how markets interpret Fed’s language. The press conference will also be of attraction for analysts. Powell will be asked about recent criticism of US President Trump to Fed’s policy of raising rates. 

Inflation near its target, solid fundamentals, a still strong labor market and a stable financial system, support the decision to raise the Fed Funds rate today. Recent volatility in markets reflected a growing uncertainty about the economic outlook. “Given that the risk balance is tilting to the downside, our outlook for the Fed has also shifted downwards. The FOMC forecasts (Dot plot) will reflect these same concerns, suggesting a slight downshift in the median projected path of the benchmark rate. That being said, we still expect the committee consensus to edge closer to two rate hikes next year, as opposed to the three implied by September’s projections”, wrote BBVA analysts. 

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At Danske Bank, economists think the Fed’s base case remains that the gradual hiking cycle will continue a bit further. “The Fed will probably remove more of its forward guidance to increase its flexibility (as it did in June), as risks to the rate outlook become more two-sided with the Fed funds rate in the broad neutral range. Do not be surprised if the Fed removes that it ‘expects further gradual increases in the target range’ from the statement. It makes sense to get rid of the one-sided rate outlook, as monetary policy becomes more neutral.”

After the statement, the Fed’s Chair will offer a press conference. “We look for Powell to sound cautiously upbeat on the outlook although the statement is likely to include less forward-looking language, consistent with an emphasis on data dependency,” said TDS analysts. 

Implications for DXY

A rate hike is fully priced in, so how the US dollar reacts will depend on how markets interpret the statement, the projections and Powell’s words. Signals about continuity in the current policy could support the greenback while if the message points to a slow down in the normalization trajectory, the greenback could retreat. 

Measured by the US Dollar Index (DXY), the dollar at the moment is showing weakens, falling for the third-day in-a-row, pulling back from multi-month highs. It is breaking a short-term downtrend line, but the Fed’s tone will likely trigger the next move.

Ahead of 19:00 GMT, DXY is trading below 96.70, at the lowest since December 10 with a negative outlook. To the downside, the immediate target is seen at 96.40 and below the next strong support is located at 96.00/05 (Nov 02 & 20 low). If the US dollar gains traction, the immediate resistance is found at 96.85; above it is likely to recover 97.00, and the next strong resistance is 97.20. A daily close clearly above 97.50 could clear the way to more gains. 

About the interest rate decision 

With a pre-set regularity, a nation's Central Bank has an economic policy meeting, in which board members took different measures, the most relevant one, being the interest rate that it will charge on loans and advances to commercial banks. In the US, the Board of Governors of the Federal Reserve meets​ at intervals of five to eight weeks, in which they announce their latest decisions. A rate hike tends to boost the local currency. A rate cut tends to weaken the local currency. If rates remain unchanged (or the decision is largely discounted), attention turns to the tone of the FOMC statement, and whether the tone is hawkish, or dovish over future developments of inflation.

About the FOMC statement 

Following the Fed's rate decision, the FOMC releases its statement regarding monetary policy. The statement may influence the volatility of USD and determine a short-term positive or negative trend. A hawkish view is considered as positive, or bullish for the USD, whereas a dovish view is considered as negative, or bearish.

About FOMC economic projections 

This report, released by Federal Reserve, includes the FOMC's projection for inflation and economic growth over the next 2 years and, more importantly, a breakdown of individual FOMC member's interest rate forecasts.