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 1.75-2.00% is widely expected today, it would be the second rate hike of the year. Markets have already discounted a hike. If the Fed delivers as expected, market participants will focus on other important things. First, are the statement and the votes. The words used on it will be watched closely.

Another key factor will be the economic projections of the FOMC staff. “The Fed's projections for interest rates showed a total of three hikes in 2018 in March and is expected to remain unchanged. An upgrade to four hikes, which was very close last time, cannot be ruled out. If they upgrade to four, it is USD positive. Otherwise, it is neutral”, said Yohay Elam, analysts at FXStreet.

The meeting will be followed by a press conference from Chair Jerome Powell. It will be his second post-meeting presser. The media reported that he wanted to have a press conference after every meeting.  His comments about that subject, the economic outlook, and the yield curve could influence markets.

Analysts at Danske Bank, expect the Fed to hike without making big changes to the updated ‘dot plot’. “We expect the Fed to update its language by stating that monetary policy ‘remains modestly accommodative’ with ‘modestly’ being a new word reflecting that the hiking cycle has come a long way and we are not far from the level of the longer-run dot.”

Will the Fed signal more than one more rate hike for the rest of they year? Will the current speed of the balance sheet unwinding continue? Could global effects influence the FOMC? Maybe not all questions will be answered but markets will offer a verdict.

Implications for DXY

A rate hike is fully priced in, so if the Fed remains on hold the greenback could drop dramatically. If the Fed delivers as expected, what the dollar does next is likely to depend on many factors. A hawkish tone would be positive for the dollar and a dovish, negative.

“Risks are largely balanced, but another non-committal press conference from Powell could leave uncertainty elevated. A drift up in the dots, or emphasis on hiking beyond neutral, would be seen as hawkish. Conversely, discussion of trade concerns or decelerating global growth would be viewed dovishly, as would support for a protracted inflation overshoot”, said analysts at TDS.

The US Dollar Index peaked late in May at 95.00, the highest level in six months. Since then it has been moving with a downside bias until it found support around 93.00/30. If the DXY gains momentum, above 94.00 it could rise again to test the 95.00 zone. A break higher could open the door to more gains in the short to medium term. On the flip side, the bearish momentum is likely to strengthen with a slide below 93.00. The next support levels might be seen at 92.70 and 92.30.

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.