The Fed is expected to give up the first of the last two interest rate hikes this year!
How can the dollar react to a rate hike without updating the economic outlook?
Here are the main points you need to know if you are planning to trade in the event:
Focus on the event:
Federal Open Market Committee (FOMC) Monetary Policy Statement
When will it be released:
July 26, Wednesday: 6:00 PM GMT
Fed Chair Powell will conduct a press 30 minutes later.
Use our forex market hours tool to convert GMT to your local time zone.
Expectations:
- The Fed is expected to raise interest rates by 25 basis points to a range of 5.25% – 5.50% (CME Fed Monitoring Tool Sees probability of 99.8% as of July 24)
- Chairman Powell will likely acknowledge recent inflation data on easing, but also convey the Fed’s readiness to address further labor market tightening or reversals in current price trends.
Relevant US data since the latest FOMC statement:
Arguments for Tight Monetary Policy / Bullish Dollar
New York Manufacturing Index For July: 1.1 (-6.0 predicted; 6.6 prior); The personnel index rose to 4.7 from -3.6 previously; The prices paid index decreased to 16.7 from 22.0 previously
NAHB Housing Market Index It was raised in July to 56 for 55; “A shortage of resale inventory means that potential homebuyers who haven’t been priced off the market continue to search for new construction in greater numbers.”
Unemployment claims rates For the week ending July 15: 228K (242K forecast; 237K prior); The less volatile four-week moving average also fell 9.25K to 237.5K.
Existing Home Sales For June: -3.3% m/m (-1.2% m/m expected; -0.2% m/m prior); This decline is mainly due to the very low stock of pre-owned homes
NFIB Small Business Index For the month of June: 91.0 (89.9 expected; 89.4 previously); “42 percent of owners reported that job openings were difficult to fill.”
University of Michigan Consumer Confidence Index for July: 72.6 (64.5 expected; 64.4 previously)
Primary US Consumer Confidence For July: 72.6 (64.5 predicted; 64.4 prior); Short-term inflation expectations increased from 3.3% to 3.4%
🔴 Arguments for easy monetary policy / bearish dollar
Industrial production In June: -0.4% yoy (0.5% yoy forecast; -0.2% yoy)
CB Leading Indicator In June: -0.7% m/m vs. -0.6% m/m in May; “The leading index fell for fifteen months—the longest streak of consecutive declines since 2007-2008, during the run-up to the Great Recession.”
CPI for the month of June: 3.0% YoY (3.2% YoY forecast; 4.0% YoY); Core CPI was at 4.8% yoy (5.0% yoy forecast; 5.3% yoy)
Import and export prices Decline in June (-0.2% m/m and -0.9%, respectively)
Standard & Poor’s Global Manufacturing in the United States For the month of June: 46.3 (as expected) compared to 48.4 in May
ISM Manufacturing PMI For June: 46.0 (48.0 expected; 46.9 prior); the Employment Index decreased by -3.3 to 48.1; The price index fell -2.4 to 41.8
Factory orders For May: +0.3% m/m (+1.5% m/m forecast; +0.3% m/m previous)
non-farm jobs For the month of June: 209K (250K forecast; 306K previously); Unemployment rate fell to 3.6% vs. 3.7% expected/previously. Average hourly earnings: 0.4% MoM (0.3% MoM expected; 0.4% MoM)
Previous issues and the impact of the risk environment on the US dollar
June 14, 2023
Overlay chart of the US dollar against major currencies on TV Planned by TV
Action / Results: For the first time since March 2022, the Federal Reserve did no He raised interest rates and kept the federal funds rate steady at a range of 5.00% – 5.25%.
The US dollar gained on the release, in part because this move was widely publicized prior to the event. Not only that, but the point projections that came with the statement showed that members would least expect two More price hikes in 2023 and no one expects a cut throughout the year.
The “optimistic pause” sent the US dollar higher in the first 15 minutes of the release. A bit of profit-taking sent it back at least 50% before ending the day near its intraday highs.
Risk Environment and Internal Market Behaviors: A combination of weak global demand concerns and an outlook for loose monetary policies kept the major currency pairs in tight ranges early in the week.
It wasn’t until China dumped a bunch of high-profile reports and the UK printed its employment data that traders made more decisive moves that contributed to the volatility boost later that week.
May 3, 2023
USD Pairs Overlay: 1-Hour Forex Planned by TV
Action / Results: As expected, the Fed raised rates by 25 basis points to a range of 5.00% – 5.25%, which is the FOMC members’ “final rate” specified in their March outlook.
Chairman Powell also said that the Fed will rely on data going forward, which traders considered dovish.
The US dollar rallied higher on the release but then started trading lower on the next 15-minute candle. The Dollar finally hit intraday lows against all of the major currencies except the Japanese Yen.
Risk Environment and Internal Market Behaviors: A combination of mixed labor market numbers, regional bank contagion fears, and recession fears dragged the greenback into a bearish trend for most of the week.
The effective interest rate hike initially gave the dollar a boost, but the dovish nature of the decision gave greenback traders license to extend the greenback’s intraweek bearishness into Friday.
price movement probabilities
Possibilities of feeling risky: Similar to the risk sentiment outlook discussed in the Australian CPI Event Guide, we believe that the overall risk sentiment is currently leaning slightly negative, but individual asset drivers are clouding the picture.
And with the FOMC event being the event to watch this week, it is likely that we will continue to see limited volatility and a weak risk bias until the Fed speaks on Wendesday (barring any big surprises of course).
US dollar scenarios
Base case: As in recent releases, the Fed can do what markets expect. In this case, the FOMC gang could raise rates by another 25 basis points to the 5.25%-5.50% range.
With such a broadly telegraphed move, the dollar’s extended reaction to the release will likely depend on Powell’s hawkishness while pressing.
With the Fed not printing a new dots plot forecast and members only in the mood for another rate hike until the end of the year, it is likely that we will see more USD selling than sustained buying after the event. Positioning could be a factor (for example, if the dollar rose before the event and the event triggered a sell-off, the selling pressure could be more intense than if the dollar fell before the FOMC statement.
Of course, the overall risk sentiment during the event plays a role in the degree and duration of USD weakness. Unless we see risk-friendly economic topics and data releases outside of the FOMC-led biases, the US dollar could fall against higher-yielding bets like the AUD, NZD and GBP but also recover by the end of the day.
Alternative scenario: If markets start discounting interest rate hikes by the Fed and ECB and start pricing in a greater likelihood of looser monetary policies (eg, concerns about higher-than-expected future growth/quickly slowing inflation), the US dollar could weaken against its peers and accelerate its decline after the Fed raises interest rates.
In the event of a risk-friendly and hostile environment for the US dollar, the greenback could see more sustained losses against the Australian dollar, Japanese yen, Swiss franc, and Canadian dollar.
Whatever scenario you choose to do more work and manage risk, keep in mind that unless we get a big surprise from the Fed on Wednesday, the impact of the FOMC statement could be short-lived as the latter half of the week’s calendar is filled with first-rate events to likely redirect traders’ focus.