It’s FOMC statement time and once again, expectations are high that there will be no changes to interest rates.
Here are major points you need to catch up on if you’re planning on trading the event:
Event in Focus:
Federal Open Market Committee (FOMC) Monetary Policy Statement
When Will it Be Released:
November 1, 2023, Wednesday: 6:00 pm GMT
Fed Chairman Powell will conduct a presser 30 minutes later.
Use our Forex Market Hours tool to convert GMT to your local time zone.
Expectations:
- Fed is expected to hold the Fed Funds target range at 5.25% – 5.50% range (CME Fed Watch tool sees 98.2% probability as of Oct. 30th)
Relevant U.S. Data Since Last FOMC Statement:
🟢 Arguments for Tighter Monetary Policy / Potentially Bullish USD
U.S Non-Farm Payrolls Change in September: 336K (150K forecast; August revised up to 227K from 187K); Average hourly earnings came in below expectations at 0.2% (0.3% forecast)
U.S. Core PCE Price Index for August: 0.1% m/m (0.2% m/m forecast / previous); 3.9% y/y (3.8% y/y forecast; 4.3% y/y previous)
U.S. CPI for September: 0.4% m/m (0.4% m/m forecast; 0.6% m/m previous) & 3.7% y/y; Core CPI 0.3% m/m (0.3% m/m forecast/previous) & 4.1% y/y
S&P Global Flash US Manufacturing PMI for October: 50 vs. 49.8 in September: “The rise in workforce numbers was led by service providers, as manufacturing firms registered a fractional drop in staffing numbers on the month.”; “rates of increase in input costs and output charges slowed at the start of the fourth quarter.”
ISM U.S. Manufacturing PMI for September: 49.0 (48.1 forecast; 47.6 previous); Prices Index decreased to 43.8 (48.9 forecast; 47.9); Employment Index increased to 51.2 vs. 48.5 previous
ISM Services PMI for September: 53.6 vs. 54.5 previous; Employment Index: 53.4 vs. 54.7 previous; Prices Index stayed at 58.9
U.S. Producer Prices Index change for September: 0.5% m/m (0.4% m/m forecast; 0.7% m/m previous); Core PPI at 0.3% m/m (0.2% m/m forecast/previous)
Cleveland Fed President Mester expressed a lean towards another interest rate increase on Oct. 20th, but emphasized the need for policymakers to remain nimble due to economic uncertainties.
U.S. Advance GDP for Q3 2023: 4.9% q/q (4.0% q/q forecast; 2.1% q/q previous); core PCE Prices was 2.4% q/q (3.1% q/q forecast; 3.7% q/q previous)
🔴 Arguments for Monetary Policy Hold / Potentially Bearish USD
Federal Reserve Bank of Dallas President Lorie Logan said on Oct. 9th that the rise in Treasury yields may mean less need for the Fed to hike rates further
Boston Fed President Susan Collins said on Oct. 11th that Fed members are going to be more patient with policy as rates are likely at or near peak.
On Oct. 13th, Federal Reserve Bank of Philadelphia President Harker said that he sees deflationary conditions and says that he favors holding interest rates at current levels
On Oct. 19th, Fed Chair Powell gave a speech at the Economic Club of New York and commented that the committee will proceed carefully, hinting at another interest rate hold at the next meeting. But given the resiliency of economic data, they are still open to another hike if necessary.
Philly Fed Manufacturing Index for October: -9.0 (-7.0 forecast; -13.5 previous); Prices paid Index: 23.1 vs. 25.7 previous; Employment Index at 4.0 vs. -5.7 previous
Previous Releases and Risk Environment Influence on USD
September 20, 2023
Overlay of USD vs. Major Currencies Chart by TradingView
Action/results:
The FOMC made no changes to the Fed funds target range as expected in September, holding the range at 5.25% – 5.50%. But what was unexpected by many was the hawkish lean taken by the committee, essentially signaling a high probability of another hike in 2023 and a low probability of significant cuts in 2024.
The U.S. Dollar quickly bounced on the event, reversing steady losses due to expectations of a potential signal that rate cuts may come in 2024.
Risk Environment and Intermarket Behaviors:
The event lineup for this trading week was super heavy! Eight central banks gave their latest monetary policy statements and global flash PMIs hit the wires all around.
High expectations of a “higher for longer interest rate environment” kept bond yields up and equities lower, also putting pressure on risk sentiment, along with net weaker economic updates and business sentiment data.
July 26, 2023
Overlay of USD vs. Major Currencies Chart by TradingView
Action/results: The FOMC hiked interest rates by 0.25% from 5.25% to 5.50%, as well as kept the door open for future rate hikes as Powell said they’ll go on a meeting-by-meeting basis.
This statement was pretty much inline with expectations and with the previous statement rhetoric, including comments that the path to the inflation target still has “a long way to go” as inflation remains stronger than expected.
USD sold off ahead of the statement and kept the trend lower after the event into the Thursday session before stabilizing ahead of fresh U.S. data, which became the focus for the Greenback after a very strong U.S. advanced GDP report update.
Risk Environment and Intermarket Behaviors: This was an incredibly busy week with monetary policy statements from the Federal Reserve, European Central Bank, & the Bank of Japan. Hard and soft economic updates also filled the calendar, and the People’s Bank of China took surprise action by intervening in the FX market to strengthen the yuan.
Overall, broad risk sentiment arguably leaned net positive, a signal that traders mainly focused on China’s promise of more stimulative efforts, net positive U.S. economic updates (rising “soft landing” narrative), and signs that the global interest rate hiking regime may be nearing its end.
Price action probabilities
Risk sentiment probabilities: Similar to the September release, this week’s calendar is action-packed, this time with three major central bank monetary policy statements, business sentiment survey updates, and employment situation updates from several major economies.
Unlike the last few meetings, the broad market environment also has to pay attention to major geopolitical developments in the Middle East, which have been a big driver of sentiment for the majority of the month of October.
Fortunately, the environment won’t be too tough to decipher as the FOMC IS the event of the week, and barring the start of World War 3 or a nuclear attack, all focus will be on this event for the Wednesday session, and likely drive broad market sentiment until the Friday U.S. employment update.
Overall though, we’ll still have to be aware of what’s going on in the Israel-Hamas war. At the moment, negative risk sentiment is falling away from the extreme levels seen early in the conflict, but as we’ve seen in the past few weeks, the situation is fluid and can shift markets like gold, oil, and the Greenback in an instant.
U.S. Dollar scenarios
Base case:
U.S. economic and sentiment updates have been strong all month, accompanied by lots of commentary from the Fed hinting at another policy hold, but an openness to hike if needed.
The recent data suggests that we could get a more hawkish lean in rhetoric from the Fed this week, which has likely been priced into the Greenback at this point given its outperformance against the majors this month, with the exception of the Swiss franc.
So, the base case is that the Fed holds interest rates, signals “higher for longer” interest rates, and is still open to another rate hike in 2023. This expected scenario plus USD holding its strength going into the event makes an argument for a “buy-the-rumor, sell-the-news” reaction (much like the July 26th reaction where the Fed hiked but the Greenback fell on the statement as the outcome pretty much came in as expected).
And if so, then short-term USD weakness (profit-taking) may hit the markets, but that reaction may also draw in bulls.
Overall, this is the type of event to wait and see the outcomes before planning a risk management strategy, especially since the news conference can shift sentiment just as strongly as the official statement.
Alternative Scenario:
The economic data in the U.S. has been unexpectedly strong surprising many, making the very low probability argument that the Fed will actually hike again this week. This is an extremely low chance given that the Fed knows the risks to economic growth from over-tightening and has repeatedly stated that patience is warranted at this time, especially with bond yields doing a lot of the Fed’s work for them.
But if they did either hike interest rate targets or shift to an extremely hawkish stance (i.e., a near guarantee of another rate hike soon), that would be unexpected and likely pull in fundie bulls & new traders very quickly into USD longs, as well as probably prompt USD fundamental shorts to lighten up. And the odds of this scenario and reaction go up if the USD falls ahead of the FOMC event.
Again, this is not the type of event to be a hero. A good practice would be to wait for the smoke to clear after the event and manage risk properly.
This content is strictly for informational purposes only and does not constitute as investment advice. Trading any financial market involves risk. Please read our Risk Disclosure to make sure you understand the risks involved.
