FOMC interest rate decision and statement will be released today at 7:00pm GMT. 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 break-even.
Even if the position is at break- even, also consider other factors such as potential slippage, and your brokers practices during extremely volatile events. If the Fed statement sees only minor revisions and minimal concern regarding the recent market turmoil the USD may be supported given the increasing bets of a dovish Fed not being realised. If however the Fed does show a degree of concern over recent events the USD may become pressured as rate hike expectations are pushed further back and March potentially took off the table for the next potential hike.
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.
At the December meeting the fed’s dots indicated that Fed officials were expecting on average 4 hikes in 2016 with the first most likely to be announced in March. Since the turn of the year however market turmoil has resulted in the market revising its own expectations with current pricing suggesting just 1 hike in 2016 as opposed to the Fed’s 4. With no press conference or updated forecasts due to be released for this event, it is unlikely that there will be any major revisions to the December statement or surprise announcements made by the Fed. The market will be paying particular attention to any comments regarding the Fed’s thoughts on the recent market volatility and global turmoil.
This article originally appeared at Jarratt Davis.