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). Janet Yellen will hold a press conference at 18:30 GMT.

Key notes

At the last meeting, the US central bank left rates unchanged (as expected). Practically all analysts expect rates to remain on hold today and the CME Group FedWatch Tool shows the odds of rate hike below 2%. Those odds jump to more than 50% for a December hike. Attention today is likely to focus on the statement, the dot-plot and Yellen’s press conference. Announcements related to the balance sheet normalization process are expected. 

“We expect the FOMC to officially announce ... that balance sheet runoff will begin in October. As the Fed has already communicated extensively about its plan for a gradual and predictable runoff, we expect markets to focus instead on the outlook for the federal funds rate”, said analysts at Goldman Sachs. 

Beyond the announcement, the new projections and the tone of Yellen will be important and they have a strong potential to impact financial markets and rate hike expectations. Analysts from Brown Borthers Harriman consider that the market's reaction to today's meeting will not come so much from the balance sheet which has been so highly anticipated, they suspect that the new economic projections “will be more important.” 

Fed is widely expected to announce the start of balance sheet reduction - TDS

FOMC Preview: 13 major banks expectation from September meeting

Implications for DXY

Volatility in the forex market remains low ahead of the FOMC meeting. The greenback has been trending lower since the beginning of the week, however moving at a slow pace. The Dollar Index awaits the decision hovering around 91.50, still near the 2-year low it reached two weeks ago below 91.00.

A balance sheet reduction announcement should be positive for the dollar but the market already discounted some kind of adjustment. So the decisive impact on the US dollar could come from the projections and the rate outlook. 

If the events from the central bank boost the US dollar, the DXY could rise to test key short-term downtrend lines between 91.80 and 92.00. A consolidation on top could add momentum to the greenback to extend the recovery. The next resistance is seen around 92.45/50. 

A dovish message from the Fed could weaken the US dollar. The relevant immediate support of the DXY is the 91.40 zone. A consolation below would expose 91.10 that protects 2017 lows at 90.90/95. 

Today’s events have the potential to resume the DXY decline in line with the main trend that points to the downside, and also, to favor a recovery that boosts the index above a key short-term resistance. 

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.