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

The Federal Reserve will announce its decision at 19:00 GMT. At the same time, updated macroeconomic projections of FOMC officials will be released, including the “dot plot” (interest rate estimations). Janet Yellen will hold a press conference at 19:30 GMT (the last post-meeting press conference from her). 

Key notes

A 25bp rate hike to 1.25-1.50% is widely expected today, it would be the third of the year. Markets have already discounted a hike and attention is likely to be in other details, mainly the outlook for 2018. Analysts will look for how many rate hikes are likely next year.  “A rate hike today has long been anticipated. The lack of a move would catch the market by surprise, and would likely produce a quick steepening of the yield curve and a dollar sell-off”, said analysts from Brown Brothers Harriman. 

If the Fed delivers as expected, the focus of attention might be the new forecasts from FOMC members. The hike per se is likely to have no impact on markets. Of more interest will be potential signals for policy in 2018 and beyond, according to Lloyds Bank analysts. They anticipate that the updated ‘dot plot’ will reaffirm policymakers’ expectations of three further rate increases in 2018. 

Janet Yellen will hold her last press conference. In February, Jerome Powell will become the Chair. “In the presser, we don’t think Chair Yellen will say anything she hasn’t said before, keeping to the tone of her recent (November 29) appearance before the Joint Economic Committee. No doubt she’ll be asked by the media about a potential Fed reaction to a $1.4 trillion net tax cut. Her answer will be coy”, mentioned  BMO CM economists that don’t expect any clues to next year.

“We expect the Fed to raise the Fed funds target range to 1.25-1.50% at next week’s meeting, in line with market pricing and other analysts. As a rate hike is fully priced in, it is by itself not a market mover and focus is on the updated projections and Janet Yellen’s press conference for more information about the director for next year”, summarized analysts at Danske Bank. 

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Implications for DXY

The greenback weakened today after the release of inflation data from the US and ahead of the FOMC statement. The US Dollar Index reached yesterday at 94.16, the highest level since November 14 and today was pulling back. The DXY found resistance at a downtrend line from March highs so it was near a critical level and today’s impact from the Fed could be relevant.

In the case of a no-rate-hike, the greenback is likely to drop dramatically and DXY could drop to test October and November lows. With the hike completely discounted in prices, the Fed is under pressure to act. 

If the central bank delivers, the impact on the US dollar will likely be determined by the “dot plot” projections, the statement and Yellen’s tone. The dollar is likely to rise if the Fed points to more than two rate hikes next year or to a potential acceleration in the normalization process. On the other way, if today’s rate hike, is signaled as the last one in a long time and/or the statement/Yellen shows concerns about the persistence of low inflation, it would be negative for the dollar.

To the upside, the key level to watch in DXY is the 94.10/15 area (downtrend line). A consolidation on top could clear the way to more gains. Main resistance is seen at 94.85 and 95.05 (October & November highs). On the downside, a retreat from current levels could mean that the DXY respected the mentioned trendline and could represent the beginning of a more significant move lower. The key supports are seen at 93.60, 93.35 (20-day moving average) and 92.50. 

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.