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.
The Federal Reserve is widely expected to keep interest rates on hold at the 2.25 - 2.5% range. A lot has changed from the last meeting and today’s statement could be the most important in months. The market has priced in now rate cuts from the Fed for the next months. So, analysts will look for signals that show how ready is the Fed to ease policy.
“We expect clear signals of rate cuts ahead at Chair Powell’s press conference and expect the dot plot to support that message,” said Nordea Markets analysts. The economic projections from the FOMC staff will also be a key driver of expectations with potential market implications.
Powell’s press conference will also create volatility across financial markets. There is no clear consensus about what he will say. At ANZ, analysts expect a shift to an easing bias and see a flattening in the dot plot. “Chair Powell is likely to reiterate that the FOMC stands ready to support the expansion. We don’t expect a pre-commitment to ease, but acknowledge there are risks to our view.”
Implications for EUR/USD
Volatility is likely to start rising around 18:00 GMT. Markets reaction to the statement, projections and Powell’s press conference is not likely to be muted or small, like other recent meetings. The outlook and market expectations changed over the last weeks and look more sensitive. A rate cut, not today but soon, is now seen in prices.
A rate cut today would be a surprise that should send the US Dollar sharply lower. The impact on the greenback will likely be determined by how the FOMC and Powell deal with market expectations.
If the Fed presents an outlook that represents more fear, lower inflation expectations, points that action may be warranted, etcetera, the EUR/USD could gain momentum. The immediate resistance is the 1.1215/1.1225 area (20 and 55 daily SMA): a consolidation on top could point to more gains and a test of 1.1250. If it continues to rise, the next critical level is seen at 1.1305/10.
On the flip direction, if the Fed does not point clearly to a rate cut and shows an upbeat tone or mentions soft inflation and growth weakness as “transitory”, the US Dollar could receive a boost, particularly if US yields move to the upside. Under a “hawkish” or a “not so dovish” scenario, the EUR/USD could face severe bearish pressure, exposing the weekly low at 1.1180. If it breaks lower attention would turn to 1.1140 that protects 1.1110.
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.
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