When is the Fed interest rate decision and how could it affect EUR/USD?
|The Federal Reserve will announce its decision on monetary policy at 18:00 GMT. Jerome Powell will hold a press conference at 18:30 GMT.
Key notes
The Federal Reserve is widely expected to lower the Fed Funds rate by 25 basis points to 2.00 - 2.25% range. It would be the first cut since the 2008 financial crisis. Market pricing points to a very small odd of a 50bp cut. Regarding the future, another cut before year-end is priced in at the moment. So if the Fed delivers as expected, the statement and Powell’s words will be watched closely for clues about the future.
"The market currently fully prices a 25bp cut and implies a 16% chance of a larger 50bp cut," explained Deutsche Bank analysts. According to them the Fed have given no real encouragement to the notion of a large cut (50bps) cut but they remembered the last time it began a series of rate cuts, “in September 2007, their opening move was a 50bp cut, and a similar 50bp cut happened when the Fed began cutting in January 2001.”
Analysts will also focus on the FOMC vote. At Rabobank, they see there could be one or two dissenting votes. “Eric Rosengren (Boston Fed) said on July 19 that as long as the economy is doing well, we don’t need accommodation. Esther George (Kansas City Fed) said on July 17 that the outlook has not changed since June when she supported the decision to hold rates steady. Loretta Mester (Cleveland Fed) may also disagree with a July cut, but she doesn’t vote in 2019.”
If it cuts, also critical for markets would be the statement and Powell’s press conference. “The question, therefore, will be to what extent the Fed signals additional easing steps beyond what was signalled in June. With no update to the Committee’s projections at this meeting, it will be up to Chair Powell to steer market expectations via the press conference. Given that this will be the first rate cut since the financial crisis, Powell will likely want to make a robust case for the move, and will sound accordingly dovish,” said ABN AMRO analysts.
Implications for EUR/USD
The US Dollar has been rising in the market since last week, particularly as market participants dampened rate cut expectations. The latest round of US data does not imply an imminent rate cut, but Fed’s officials explained that the problem is the outlook. The numbers helped limit rate cut expectations for the future and pushed the greenback higher.
The EUR/USD broke a consolidation range last week and tumbled, hitting the lowest intraday level in two years but managed to hold on top of the 1.1100 area. The mentioned zone is now a critical resistance, and a break lower would increase the bearish pressure on the Euro, leaving the pair vulnerable to a sharp decline maybe toward 1.1000 (intermediate support at 1.1060).
The impact on the US Dollar will likely depend on the rate cut and the language used by the FOMC. Also, price action could move from top to the bottom many times in a few minutes, so where EUR/USD actually ends the day or the week, will likely hold the key.
If the Fed delivers a 50bp cut or if it shows strong willingness for sharper stimulus actions, the US Dollar could get hit, boosting EUR/USD. To the upside, the unmediated resistance is seen at 1.1160, followed by 1.1200/10 (Horizontal level and also 20-day moving average) and by 1.1280/85.
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.
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