January Fed Meeting (FOMC) Preview: What to Expect for the USD

For the first time since August 2007, the Federal Reserve is not expected to change interest rates. With the fed funds rate now set to a target range of 0 to 0.25 percent, the Federal Reserve has maxed out on their most conventional monetary policy tool. Although they still have different ways of adding liquidity to the financial system and stimulating the economy, what was once the second most market moving event risk for the foreign exchange market could become a non-event. Going forward, traders may have the same disregard for FOMC rate decisions as they do for Bank of Japan meetings. The only way for Wednesday’s FOMC rate decision to hurt the dollar would be if the central bank announces that they will be purchasing long term US Treasuries in size or if they add more ingredients to their alphabet soup of new programs. There is nothing to support the dollar on the upside as the Fed is not expected to start talking about raising interest rates.

FOMC Decisions Could Become a Non-Event for the US Dollar

The last time that the Federal Reserve drew an end to a major easing cycle was in 2003 when they took interest rates to 1 percent from a high of 6.5 percent in 2000. At that time, interest rates hit the lowest level in more than 40 years. The last rate cut that the Federal Reserve made during that easing cycle was in June 2003. The following charts illustrate how the EUR/USD traded following the next 2 interest rate decisions at which interest rates were left unchanged at 1 percent. In August of 2003, the EUR/USD fell 30 pips in the hour following the rate decision and by the open of the European trading session it was down a total of 80 pips. The move was very gradual and happened over the course of many hours, which is unlike the type of volatility seen after recent FOMC rate decisions. The same indifference to the FOMC rate decision happened in September 2003 as well. The EUR/USD fell less than 20 pips in the hour following the rate decision and proceeded to fall another 30 pips over the next 8 hours.

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