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FOMC Preview: Dovish Rate Hike to Drag on USD Rates

FOMC Preview: Dovish Rate Hike to Drag on USD Rates

David Song, Strategist

- Federal Open Market Committee (FOMC) to Deliver 25bp Rate-Hike in December.

- Will Fed Officials Trim the Longer-Run Forecast for the Benchmark Interest Rate?

Trading the News: Federal Open Market Committee (FOMC) Interest Rate Decision

FOMC Rate Decision

The Federal Open Market Committee’s (FOMC) last interest rate decision for 2017 may spark a bullish reaction in the U.S. dollar as the central bank is widely expected to lift the benchmark interest rate to a fresh threshold of 1.25% to 1.50%, but the fresh projections from Chair Janet Yellen and Co. may drag on the greenback should a growing number of central bank officials project a more shallow path for the benchmark interest rate.

Fed Interest Rate Forecast

The FOMC may opt for a dovish rate-hike as ‘many participants observed that there was some likelihood that inflation might remain below 2 percent for longer than they currently expected,’ and the central bank may largely endorse a wait-and-see approach for 2018 as ‘several participants expressed concern that the persistently weak inflation data could lead to a decline in longer-term inflation expectations or may have done so already.’

In turn, a downward revision in the longer-run forecast for the benchmark interest rate is likely to produce a bearish reaction in the greenback as the Fed runs the risk of completing its hiking-cycle ahead of schedule, and the dollar may exhibit a more bearish behavior ahead of the upcoming rotation within the FOMC as the central bank struggles to achieve the 2% target for price growth. Interested in watching the market reaction? Sign up and join DailyFX Chief Currency Strategist John Kicklighter LIVE to cover the FOMC interest rate decision.

Impact that the FOMC rate decision had on EUR/USD during the previous meeting

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

NOV

2017

11/01/2017 18:00:00 GMT

1.00% to 1.25%

1.00% to 1.25%

-3

-7

November 2017 Federal Open Market Committee (FOMC) Interest Rate Decision

EUR/USD 5-Minute Chart

EUR/USD Chart

As expected, the Federal Open Market Committee (FOMC) kept the benchmark interest rate on hold in November, with Chair Janet Yellen and Co. reiterating that ‘the Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate.’ It seems as though the central bank is on course to deliver a December rate-hike as the U.S. economy approaches full-employment, but a growing number of Fed officials may forecast a more shallow path for the interest rate as the FOMC struggles to achieve the 2% target for inflation.

More of the same from the Fed sparked a limited market reaction, with EUR/USD largely holding steady throughout the North American trade to end the day at 1.1618. Don’t have a plan for trading theFOMC rate decision? Download and reviewing the FREE DailyFX Advanced Guide for Trading the News to learn our 8 step strategy.

EUR/USD Daily Chart

EUR/USD Daily Chart
  • Near-term outlook for EUR/USD remains capped by the 1.1960 (38.2% retracement) hurdle, with the downside targets on the radar as the pair struggles to push back above the former-resistance zone around 1.1810 (61.8% retracement) to 1.1860 (161.8% expansion), while the Relative Strength Index (RSI) snaps the bullish formation carried over from November.
  • Next downside region of interest comes in around 1.1670 (50% retracement) followed by 1.1580 (100% expansion), which sits above the November-low (1.1554).
  • Need a break above the monthly-high (1.1940) paired with a close above the 1.1960 (38.2% retracement) hurdle to adopt a bullish outlook for EUR/USD, with the next topside region of interest coming in around 1.2130 (50% retracement).

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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