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

The Federal Reserve will announce its decision at 18:00 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 18:30 GMT.

Key notes

A 25bp rate hike to 2.00-2.25% is widely expected, it would be the third rate hike of the year. Markets have already discounted a hike. If the Fed delivers as expected, market participants are likely to focus on the projections, the tone of the statement and Powell’s press conference. Most analysts also expect a rate hike in December after a pause in November. Hints about the Fed’s plan for next year is what markets will be watching.

With the US economy is in good shape, unemployment at multi-year lows, confidence at the highest since 2000, wage growth rising, PCE core inflation at 2% and the trade war showing no material impact, the Fed can continue to tighten.

“We do not expect it to be necessary for the Fed to send any new important signals to the markets. We believe the most important parts of the statement will remain unchanged and even if the sentence ‘monetary policy is accommodative’ is removed or changed, it should not matter much, in our view, as it would just reflect reality”, said Danske Bank analysts. According to them, the Fed will most likely still signal another hike in December and three hikes next year.

The debate over the natural rate of interest is becoming a key factor so markets could be sensitive to any comments or signals about it. “The additional two rate hikes before the end of the year would bring the fed funds rate to 2.25%-2.50%, only about 50 bps below what most Fed officials estimate to be “neutral”,” wrote analyst at Wells Fargo. They are in the camp that the FOMC will carry on raising rates by 25bps points once a quarter through the third quarter of next year. “At that point, the fed funds rate is likely to be slightly restrictive based on FOMC estimates. Markets, however, are more skeptical. Futures point to the fed funds rate rising to about 2.75% by next September.”

Implications for DXY

A 25bp rate hike is fully priced in, so if the Fed remains on hold the greenback could drop dramatically but is extremely unlikely. If the Fed delivers as expected, what the dollar does next is likely to depend on many factors, from a potential “buy the rumor, sell the fact” to possible surprises and changes to the projections.

The US Dollar Index has been trading around 94.20 during the last three days. Ahead of the meeting is moving with an intaday bullish bias but still within the range 94.40/93.85. The mentioned consolidation follows a decline that started back on August 15, from 96.98, the highest level in 13-months. The main trend still points lower but so far the decline found support at 93.80/90.

The key level to the upside is 94.50. A daily close above would signal more gains for the US dollar and also a potential interim bottom. On the flip side, the bearish pressure is likely to rise with DXY below 94.00 while a close significantly under 93.80 should open the doors for another leg lower with a potential target at 93.20/30.

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.