Heads up, forex traders! Dollar pairs could be in for a wild ride tomorrow with the FOMC set to announce their monetary policy decision at 6:00 pm GMT. While Fed Chairperson Janet Yellen and her gang of policymakers aren’t expected to make any major changes at this point, market watchers will be on the lookout for clues on when the “liftoff” might take place.
Liftoff? What liftoff?
In case you’re just tuning in, lemme give you a quick rundown on what the Fed’s been up to these days. Thanks to a steady pace of improvement in U.S. economic data, the U.S. central bank is way ahead of its peers in the race to hike interest rates. Some say that the Fed can have its liftoff (a fancy term for monetary policy tightening) by September while others say that FOMC members are more inclined to wait until December or early next year. Of course most of this hinges on the central bank officials’ economic assessment and outlook, which is why their policy statement is a big deal.
How did the previous FOMC meeting turn out?
The June FOMC statement was a bit of a disappointment, as the Fed seemed hesitant to commit to a September rate hike. Yellen explained that no decision has been made on the actual timing of their liftoff, but said that “the committee obviously thinks that the economy is likely to do well enough to call, likely call, for some tightening later this year.”
At that time, policymakers also shared a dot plot of their interest rate projections, hinting that two interest rate hikes might be seen before the end of the year. However, dollar bulls had to cut their party short when the Fed also announced downgrades for their employment and growth forecasts. Minutes of the June FOMC meeting revealed that some policymakers were concerned about hiking too soon, citing that there were plenty of risks facing both the domestic and global economy.
What’s expected for the upcoming statement?
Forex junkies aren’t really expecting major announcements from the FOMC this week since Fed head Yellen doesn’t have a scheduled press conference afterwards. Keep in mind, however, that Yellen sounded upbeat about U.S. economic prospects in her testimony to Congress the other week, so a few more hawkish hints could be shared this time.
As always, Yellen might also decide to downplay the importance of the first rate hike, reminding market participants that the longer-term pace of tightening would be more crucial. Fed officials could also zoom in on the latest set of economic challenges posed by falling commodity prices and the threat of another global inflation downturn.
Where could the U.S. dollar be headed?
The Greenback’s reaction really depends on the tone of the FOMC’s statement, with a hawkish announcement likely to spur strong gains and a cautious tone set to trigger dollar weakness. Bear in mind that their next policy announcement is actually in September, which means that it’s now or never when it comes to letting market watchers know what they plan to do by then.
Either way, this top-tier catalyst could spark a lot of volatility among dollar pairs so make sure you’ve made the proper adjustments to your forex positions ahead of the event. If you’re gutsy enough to trade during the actual announcement, don’t forget to practice sound risk management. And if you’re not a fan of potentially large price swings, there ain’t no shame in sitting on the sidelines and just figuring out how the FOMC statement could affect longer-term trends. Good luck!