eur fundamentals

US Dollar Outlook Will Depend on Tomorrow's Fed Rate Decision

Tuesday, 29 January 2008 19:51:59 GMT  |  David Rodriguez, Currency Analyst

The US dollar traded within a narrow range against the euro and other major forex pairs, as currency speculators remained to the sidelines ahead of tomorrow’s critical US Federal Reserve interest rate decision. Stronger-than-forecast US Durable Goods and Consumer Confidence reports were not enough to force dollar appreciation, economic sentiment seems relatively unchanged despite the bullish economic releases. Durable Goods Orders rose a surprising 5.2 percent through December, while the Conference Board Consumer Confidence reading fell less than feared through January. Such news should have arguably been enough to provide a dollar bounce and a shift in Fed rate forecasts, but traders clearly remain on edge and are unsure of what to expect from the FOMC in tomorrow’s rate decision.

Expectations for the highly-anticipated Federal Reserve interest rate decision favor a 50 basis point rate cut from the US central bank, but such forecasts are far from definite as many are unsure of what to expect from the policy-setting body. According to Eurodollar interest rate futures options, traders price in an almost-negligible 4 percent chance that the Federal Open Market Committee will leave its Fed Funds Rate unchanged at 3.50 percent. Indeed, the majority of traders have cast their vote in favor of a much more aggressive ½ percent rate cut with a substantial 65 percent chance that the FOMC will reduce rates to 3.00 percent. Such probabilities suggest that the dollar stands to gain on anything less than a 50bp rate cut, while the currency stands to lose further on anything more than 0.25 points in rate reduction. Given such indecision ahead of the event, markets may remain relatively motionless ahead of Wednesday’s announcement at 14:15 Eastern Time, 19:15 GMT.

Read our special Federal Reserve Rate Decision Outlook and implications for the dollar.

Where is the Dollar headed? Share your opinion with fellow currency traders on the DailyFX Forex Forum EUR/USD Discussion.

Written by David Rodríguez, Currency Analyst for DailyFX.com,

 Tell us what you think about this article;  e-mail drodriguez@dailyfx.com

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