When is the Fed interest rate decision and how could it affect DXY?

The Federal Reserve will announce its decision at 18:00 GMT.  Jerome Powell will hold a press conference at 18:30 GMT. Also the central bank will present the Summary of Economic Projections.

Key notes

The Federal Reserve is widely expected to keep interest rates on hold at the 2.25 - 2.5% range. At the last meeting, the Fed took a dovish shift signaling more “patient” ahead. Fed-funds futures show no expectation about a rate hike over the course of the year and some odds of a rate cut on the back of the latest round of US economic data that came in mixed. Manufacturing activity eased, and employment growth pulled back. Also, the global outlook continues to point to a slowdown, and the US-China trade deal is still not there. On the positive side, consumer spending remains firm. 

Muted inflation pressures present a strong argument for the Fed to keep its relatively new approach. James Knightley, Senior Economist at ING, sees the Fed sticking to its “patient” approach and warns about some potential announcements regarding the balance sheet with “quantitative tightening” seemingly coming to an end. At ING, they continue to look for one 25 basis point rate hike in the second half of the year, considering a return to growth and easing trade tensions. 

What the central bank says about the balance sheet will be a relevant issue. Fed’s portfolio totals more than $4 trillion. The central bank could announce today or soon how it plans to stop the balance sheet reduction program. The Fed will present the statement and also updated forecasts that are expected to be tilted to the downside, considering the economic data released since the December meeting (last report). “We expect the Fed to lower its 'dot' signal to one rate hike in 2019 (down from two). We expect them also to be revised lower for 2020 and 2021 and would not be surprised if the Fed signals 'one and done'. That said, the Fed has begun downplaying the importance of the dots, so we would be careful putting too much weight on them going forward. Our current base case is two rate hikes (in June and December) based on our overall positive economic outlook, but if the Fed continues focusing on inflation expectations, a June hike seems less likely, as market-based inflation expectations are well below the historical average”, said Danske Bank analysts. 

Implications for DXY

On March 7, the DXY hit multi-month highs following the European Central Bank meeting, but failed to hold around 97.50 and reversed to the downside. Since then it has fallen constantly and bottomed yesterday at 96.30. The move lower took place amid a decline in US yields, affected by the change in the Fed’s stance and US data. 

The US dollar could be hit by a more dovish than expected tone from the Fed and Powell today, and also by a significant change in the “dot plot,” for example, pointing to no rate hikes over the next quarters. On the contrary, if the Fed is seen as not so dovish, for example, looking to one or two rate hikes over the course of the year or mentions that the balance sheet normalization could go on for more time than what is currently expected, the greenback could strengthen. 

If the DXY rebounds, the critical level to watch is the 96.60-96.80 resistance zone. A break higher would reinforce the bullish scenario, putting the index back into an ascendant channel. On the contrary, a break under 96.30 would clear the way for a test of 96.00 and would confirm the breakout of the bullish formation, exposing 2019 lows. 

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.