When is the Fed interest rate decision and how could it affect DXY?
The Federal Reserve will announce its decision on monetary policy at 18:00 GMT. There won’t be a press conference. The minutes will be released in three weeks (August 22) and the next meeting will be September 25/26 (will include new macroeconomic projections and post-meeting press conference).
Key notes
Market participants expect no change in rates and there is no press conference, so the impact on price action could be limited. Market participants will look for clues about the path of monetary policy. Today the 10-year yield rose above 3.0% for the first time since June. The move was boosted by a sell-off in Japanese government bonds. Also positive employment data (ADP) was offset by a bigger-than-expected slowdown in US manufacturing data.
“The Fed is watching the developments closely. So far, growth outweighs uncertainty about the trade. But if the forward-looking PMI data translates into a substantial slowdown, Powell and co. may have a change of heart or even a U-turn. While the September hike seems unstoppable, a move in December depends on Donald Trump's tariffs”, said Yohay Elam, analyst at FXStreet.
The US economy remains firm and solid while inflation expectations according to analysts continue to rise slowly. Those factors warrant further rate hikes from the Fed but not likely today. The next move is expected to take place at the September meeting.
“The FOMC is widely expected to leave rates unchanged in August and we do not expect any material changes in the policy statement, with only a mark-to-market update to reflect recent pickups to growth and inflation”, wrote analysts at TD Securities. They do not expect any dissents for a rate hike or changes to the balance of risks.
Implications for DXY
The tone around the greenback improved yesterday but price action remains limited with currency pairs moving in ranges. The US Dollar Index is also moving sideways between 94.90 and 94.10. The 20-day moving average of the DXY is flat, inside the range, reflecting the current stance.
Today’s FOMC statement is not expected to contain surprises. If that is the case, the DXY could continue to move in the range. It would require hawkish signals for the US dollar to gain momentum. In that scenario, the Index could rise toward 95.00. A break higher could lead to more gains but a daily close well above 95.30 is needed in order to open the doors for an extension.
A dovish FOMC pointing to increasing risks to growth or to a pause in the rate hike cycle (not expected) could trigger a sell-off of the US dollar. The immediate strong support is the 94.00 area. A consolidation below would favor more losses ahead with a potential target at 93.40.
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.