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, updated macroeconomic projections of FOMC officials will be released, including the “dot plot” (interest rate estimations). Jerome Powell will hold a press conference at 18:30 GMT (the first post-meeting press conference). 

Key notes

A 25bp rate hike to 1.50-1.75% is widely expected today, it would be the first hike of the year. Markets have already discounted a hike. “There is nearly universal agreement that the FOMC will hikes rates at Powell’s first meeting. This is being taken for granted.  The failure to raise interest rates would be significantly more disruptive than a hike at this juncture.  Indeed, the focus is not so much on the rate hike, but the forward guidance provided by the FOMC statement and the Fed’s forecasts (dot plot)”, wrote analysts from Brown Brothers Harriman. 

Most analysts expect no significant changes in the statement. The “dot plot” and Powell’s press conference are likely to be the main movers if the Fed raises the Fed Funds rate. The current debate hovers around how many times will the Fed raise rates during 2018 and also includes the impact of tax cuts on the economy. 

“We think the Fed will signal it is time actually to hit the brakes by raising the Fed funds rate above the longer-run dot of 2.75% (the Fed's view on the nominal level of the natural rate of interest when the economy has normalised) in coming years, as we expect the Fed to raise the dot signal for 2019 from slightly more than 2 hikes to (close to) 3 hikes”, said analysts at Danske Bank.

According to Goldman Sachs, with tax cuts now implemented and an additional boost from higher federal spending this year, most participants are embracing the "from headwinds to tailwinds" narrative, so they expect a slightly hawkish tone. 

Implications for DXY

If the Fed delivers as expected, the impact on the currency market is likely to be related with the ‘dots plot’ and the updated forecast for the US economy. Signals of more rate hikes and/or a positive revision of main economic variables should offer support to the US dollar. On the flip side, signals of a slowdown in the tightening cycle, could weaken the US dollar. 

The US Dollar Index was modestly lower before the release. On a wider perspective, DXY has been moving mostly sideways, near the 90.00 handle during the current month. If the greenback strengthens after the meeting, the immediate resistance might lie at 90.55/60. Above the next area to watch is 91.00. A consolidation on top of 91.00 could open the doors to a test of a downtrend line from 2017 at 91.25. A break higher would improve the technical outlook for the USD. 

A slide of the US dollar, would see the DXY testing the 89.85 immediate support. Below that area the next key level is 89.50. A daily close significantly below would be supportive of further declines. Next support is seen at 89.00. 

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.