FOMC Interest Rate Decision and Statement will be released today at 6:00pm London time. If the Fed strike a hawkish tone in their statement then the market will be satisfied to hold dollars into the next meeting. However, if the Fed tone is dovish we will likely see pressure on the USD as expectation for a hike in 2015 will decline.
The FOMC meet to decide the Federal Funds Rate, which is the interest rate at which depository institutions lend balances held at the Federal Reserve to other depository institutions overnight. They announce their decision alongside a statement. The FOMC Statement is the primary tool the FOMC uses to communicate with investors about monetary policy. It contains the outcome of their vote on interest rates and other policy measures, along with commentary about the economic conditions that influenced their votes. Most importantly, it discusses the economic outlook and offers clues on the outcome of future votes. The FOMC usually changes the statement slightly at each release; it’s these changes that traders focus on. Four times per year the FOMC also publish a report for Economic Projections. This report includes projections for inflation and economic growth over the next 2 years and, more importantly, a breakdown of individual FOMC member’s interest rate forecasts. On the occasions where the Statement is accompanied by Economic Projections, the FOMC also holds a press conference. The press conference is about an hour long and has 2 parts; first, a prepared statement is read, then the conference is open to press questions. The questions often lead to unscripted answers that create heavy market volatility.
The USD remains one of our strong fundamental currencies in the medium term due to the Fed’s intentions to begin normalization once the circumstances permit. We are not likely to see a change at this meeting so the market will be focused on the tone of the statement, as well as any comments we may see from central bank members. The market will be attempting to interpret comments and looking for any clues to potential Fed action in December. We will not see economic projections or have a press conference after this release, both will occur again in December. Fed Fund Futures put the probability of a rate hike for this meeting at just 6%.
Expected Market Reaction:
This event will likely see volatility and widening of spreads in the seconds before release. We advise against holding USD positions unless they are already at breakeven. The longer term outlook for the dollar remains bullish, however there is the chance of a short squeeze should the market lose confidence in the Fed making a move this year. If the Fed raise rates, which is unlikely, then we will see sudden strength in the dollar. If the Fed keep rates on hold, which is likely, then we may see a small immediate dip in the dollar, but again, the next leg will be a function of the accompanying communications.
Check out my weekly Forex news events overview here to learn more about this release.