When is the Fed interest rate decision and how could it affect EUR/USD?

The Federal Reserve (Fed) will announce its decision on monetary policy today at 19:00 GMT.   Chairman Jerome Powell will read a statement and hold a press conference at 19:30 GMT. 

Key notes

The Fed is expected to keep the Fed Funds rate unchanged at the 1.50 - 1.75% range. After cutting interest rates three times in a row, market participants see no change for the second consecutive meeting. Members of the Federal Open Market Committee (FOMC) consider, at least until today, the current stance of monetary policy as “appropriate”. 

There will be a change among voting members. Eric Rosengren, Esther George (haws), Charles Evans and James Bullard (doves) will be replaced by Neel Kashkari (dove), Robert Kaplan, Loretta Mester and Patrick Harker (hawk).

Since the last meeting, global economic indicators continued to stabilise, recession fears in the US eased, and the US and China signed the “phase one” trade deal. On the negative, the Coronavirus outbreak could have a significant impact on Chinese and global economic growth. 

At these meeting, the Fed will not release updated economic projections, but Chairman Powell will hold a press conference. Not much change is expected from the Fed. The statement and Powell’s words will be followed closely. Many analysts expect changes in the interest rate on excess reserves (IOER). “We expect officials to announce a 5bp increase in the IOER to 1.60% in order to better align the effective funds rate with the mid-point of the target range. Fed officials will (rightly in our view) insist that the change is "technical," as the effective rate has been running below the 1.625% target range midpoint. Moreover, as usual, the IOER will be relegated to the separately released monetary policy "implementation note," and not the FOMC statement itself”, explained analysts at TD Securities. 

Implications for EUR/USD 

The American dollar has strengthened ahead of the meeting. The DXY is rising on Wednesday for the fifth time in a row and stands at the highest in a month. The EUR/USD has fallen a hundred pips over the last five trading sessions and currently is testing the critical 1.1000 area.

Many analysts consider the FOMC meeting could end up being a non-event, taking into account its influence on markets. But if the Fed offers a (hawkish) surprise, the greenback could extend the current rally. If EUR/USD holds below 1.1000 and breaks 1.0980, more losses toward 1.0960 first and then to 1.0940 seems likely. 

On the contrary, if the central bank meeting turns out to be “dovish” the US dollar could start a correction. The current level of the EUR/USD offers the possibility of a significant corrective rally. It is holding near a strong area (1.1000) that capped the downside during November. The recovery of the pair could extend to 1.1035 first and then to 1.1060.

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.