How to trade the Fed's decision after Trump's victory

The Federal Reserve (Fed) is the United States (US) central bank. A central bank usually provides financial and banking services to its country's government and commercial banking system. 

It also issues the local currency and implements monetary policy. Each decision has a vast impact on the value of the local currency, and hence, Forex (FX) traders pay extreme attention to each announcement. 

The Fed meets roughly every six weeks, or eight times a year, for two consecutive days, announcing its decision afterward. The decision is made by a limited number of Fed officials, known as the Federal Open Market Committee (FOMC).

Does the Fed's decision provide opportunities for traders?

Indeed, the Fed’s decisions usually trigger volatility across financial markets. 

Generally speaking, changes in the interest rate affect all companies and households. Simply put, higher rates lift money costs, resulting in restricted consumption. The Fed hikes rates when it wants to cool down consumption and, hence, inflation. 

The opposite scenario is also valid. Lower rates tend to boost consumption and, therefore, economic growth. 

At the same time, hiking rates typically strengthen a currency –in this case, the US Dollar (USD)–while trimming them usually weakens it.

However, there is one caveat: Market players often anticipate the decision and price it in, selling or buying the USD ahead of the announcement. In this case, however, the market’s attention stands elsewhere after the US presidential election. The US Dollar soared early on Wednesday as former President Donald Trump was elected as the 47th US president. 

So far, Trump has secured 277 electoral votes, seven more than the 270 electoral votes needed to become president. Trump declared victory after winning some key swing states such as Georgia, North Carolina and Pennsylvania.

The DXY US Dollar Index, which gauges the value of the US Dollar against a basket of major currencies, has fallen in the days ahead of the Fed meeting as investors broadly expect the central bank to cut interest rates.  

Volatility within this kind of event is usually linked to the deviation between the market’s expectation and the actual decision. 

What is expected the Fed will do in the upcoming November meeting?

Before the announcement, investors have priced in a 25 basis points (bps) cut to a range between 4.50%-4.75%. At the time being, the odds for such a decision stand at 97.5%, according to the CME FedWatch Tool, having changed little after the US election outcome. 

Odds for Federal Reserve interest rate changes according to CME

This time, the Fed will not release the Summary of Economic Projections (SEP), a report that provides insights into the economic outlook and expectations of the FOMC members. It is released four times a year, with the latest published in September and the next one coming in December.

The document includes officials' perspectives on key economic figures, such as Real GDP Growth, the Unemployment Rate and Inflation. Additionally, the SEP projects the federal funds rate, which is the interest rate at which banks lend to each other. 

The SEP does not grant future action or levels of economic improvement, it just outlines policymakers’ perspectives on them.

The latest release showed that officials project additional half-percentage point rate cuts in 2024, meaning 25 bps trims in November and December. Economic projections also showed another full percentage point of interest rate cuts in 2025.

Additionally, Fed officials foresee the unemployment rate rising by year-end and to remain elevated into 2025. Policymakers reduced inflation expectations, seeing it at 2.3% by the end of this year, 2.1% next year, and around 2% in 2026. The core PCE target is now forecast to decline to 2.6% by the end of this year, 2.2% next year and 2% in 2026.

Finally, the Fed decreased its growth forecast for this year from 2.1% to 2%, while retaining its 2025, 2026 and 2027 estimates at 2% and maintaining its long-run growth projection of 1.8%.

What are the different scenarios and how to trade November’s Fed decision?

As said, the USD reaction will depend on Fed’s ability to surprise investors. 

Generally speaking, the interest rate announcement will trigger the initial reaction. If policymakers keep rates on hold, that would be an unexpected outcome and be read as hawkish, resulting in the US Dollar soaring across the FX board. 

Officials, however, are unlikely to proceed this way, as they usually refrain from triggering volatile markets’ reactions.

A 25 bps trim, as expected, will have no significant impact on the USD, particularly in the current scenario with the focus on Trump’s victory.

Speculative interest will then wait for Chairman Jerome Powell's speech. Powell’s press conference usually hints at what the Fed may or may not do in the next meeting. This time, questions will likely revolve around how Trump’s victory will affect future Fed decisions. 

For sure, Powell will deny any potential governmental influence on the Fed’s decision and reaffirm the central bank’s independence. 

Main events related to the September’s Federal Reserve decision. Source: FXStreet

Given the USD momentum ahead of the announcement, dovish words from Chair Powell could trigger a bearish correction. Still, it could be short-lived, as speculative interest will likely resume buying at better levels.

Hawkish words will maintain the USD on the bullish side, yet the lack of surprise could moderate gains. 

Generally speaking, and unless the message is super clear from all sides, the market would take some 15 minutes to find its way. The initial reaction could be wiped out, and the USD could change course pretty fast afterwards. 

Once the dust settles, and if there is a clear path for the Greenback, the most likely scenario is that such a directional move will resume once Asian traders reach their desks.