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

The Federal Reserve will announce its decision on monetary policy at 19:00 GMT. There won’t be a press conference. The minutes will be released in three weeks (February 14) and the next meeting will be March 20/21 (will include new projections and press conference). 

Key notes

Market participants expect no change in rates at the last meeting presided by Janet Yellen. In March, the Chair will be Jerome Powell. Yellen is leaving not only the Chair, but also the Board of Governors. According to the CME Group Fed Watch Tool, the odds of a rate hike today are below 5% and rise to 75% for a hike in March. 

Economic data continue to points to a strong US economy particularly the labour market. Today’s ADP report showed that the private sector added 234K jobs in January “Given the strong January job gain, 2018 is on track to be the eighth consecutive year in which the economy creates over 2 million jobs. If it falls short, it is likely because businesses can’t find workers to fill all the open job positions”, said Mark Zandi, chief economist of Moody’s Analytics. Jobs and growth continue to be main supporters of Fed’s normalization, as inflation remains subdued. 

No significant moves are expected from today’s events at the Fed. "We expect no change in the policy rate at the upcoming 30-31 January FOMC meeting and no material changes or surprises in the post-meeting statement. Incoming data during the intermeeting period have been largely positive, affirming continued growth above potential”, explained analysts at Nomura. 

If as expected, the FOMC holds policy unchanged, the focus will be on the statement and the language with analysts looking for clues about what the central bank might do next. 

 “Since December, a weaker US dollar; little change in term interest rates; and the passing of tax reform all warrant greater short and medium-term optimism over the outlook. Due to these factors, Westpac has revised its expectations for the Fed. We look for 25bp hikes at the March; June and September meetings” said analysts from Westpac. 

FOMC meeting to be an upbeat affair - Westpac

FOMC is becoming more inexperienced - Danske Bank

FOMC should emphasize continuity, with no significant changes - TDS

Implications for DXY

The greenback arrives at the FOMC meeting being unable to recover ground after falling sharply in January. The US Dollar Index is consolidating near 3-year lows. The main trend continues to point to the downside. 

Fed's tightening cycle has been unable to offer support to the USD. The divergence in policy expectations with other central banks has been trending lower over time, removing a crucial support from the USD. 

On Wednesday, the DXY (spot) approached last week lows but rebounded. It is hovering around 89.00 ahead of the release of the statement. If the meeting offers a hawkish surprise, the index could start a recovery. A confirmation on top of 89.60 could signal that a potential short-term bottom is in place. Above the next strong resistance is seen at 90.40. 

If the FOMC points toward a more gradual than expected rate hike cycle or if the statement contains some dovish comments, the greenback is likely to face bearish pressure. In that case, DXY could drop to test 88.70 and below, January lows at 88.45 would be exposed. The next support might be seen at 88.00. 

Dollar remains vulnerable ahead of FOMC, NFP

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.