Potential US Dollar Reactions to FOMC Decision

The Federal Reserve Open Markets Committee will release their latest guidance on US monetary policy on Wednesday, February 1.

Federal Reserve members, who vote on whether to raise or lower interest rates, have indicated they expect to increase rates at least twice this year, but it is not generally expected that they will in February.

Nevertheless, despite not expecting any fireworks analysts still expect changes – and these will likely have an impact on the US Dollar.

Wait Until June, Say Nordea

The Fed will stand pat on rates at their February meeting because of considerable political uncertainty in relation to the impact of Donald Trump’s trade and economic policies, says Nordea Bank’s FX analyst Jonny Bo Jakobsen.

The FOMC committee will want to wait until more information is forthcoming on Donald Trump's plans, especially his fiscal stimulus policies, before they react with their own monetary policy agenda.

Jakobsen reports odds of an interest rate hike at the February 1 meeting currently stand at only 15%.

He sees a material risk of a rate rise in March if inflation and employment data beat estimates, otherwise, Nordea’s base case is for a June rise.

The broader market expects the Fed to hike rates in June.

Any sign that a rate hike could come sooner could boost the Dollar.

Beware an Optimistic Fed: BofA

There is a risk the Fed will sound more optimistic at its meeting on Wednesday, leading to rise in the Dollar and short-term rates, according to analysis from Michelle Meyer at Bank of America Merrill Lynch (BofA).

Meyer says that there is so little chance the Fed will change rates that it is what they “say” rather “do” which will be of more importance.

Meyer expects the Fed to highlight an improvement in the labour market and confidence measures at the meeting.

“In our view, these changes would be perceived as a bit more hawkish. The market is pricing in just over two hikes this year and another two in 2018, we similarly look for four hikes over this year and next but believe the risk is for a faster cycle to start next year,” said Meyer.

If such a tone is adopted it would support the USD.

Statement to be Upbeat say DNB

A more upbeat statement is expected from the Federal Reserve by DNB Bank’s economist Knut Magnussen.

Strong recent employment data is expected to lead to an upgrading of the outlook for the economy which will probably lift the Dollar too.

“A somewhat more upbeat statement likely at the meeting starting today (with statement due tomorrow 19.00 GMT) due to stronger data. Still fiscal policy will be key to monetary policy going forward,” said Magnussen.

Trump Factor Could Delay say City Index

Politics appears to be a new front traders need to be wary of in the wake of comments by senior Government officials relating to the Dollar's valuation.

Watch for any reaction to Trump’s first steps as President.

"In fairness, we don’t think that the Fed will wade into this debate, however, the statement may reference the fact that economic forecasting is tricky without clarity on Trump’s fiscal policy. If the Fed sounds like it is on hold until it gets more information about the future of the government’s spending plans, then this could be perceived as dovish and may weigh on the Dollar, while boosting stocks," says Kathleen Brooks at City Index.

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