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Fed to hold rates & unlikely to signal slower tightening after stocks sell-off

The US Federal Reserve will announce its latest monetary policy decision on Thursday at 19:00 GMT after concluding a two-day meeting.

While the Federal Open Market Committee (FOMC) is almost certain to keep its benchmark rate unchanged this month, investors will be watching for any tweaks to the statement language for clues about the future pace of rate hikes. In the absence of any unease by FOMC members about the recent volatility in stock markets, the US dollar could head back towards last week’s 16-month highs as this would signal that the Fed does not intend to pause raising interest rates.

There can be no refuting that the US economy is at its strongest in years, with the unemployment rate at a 49-year low, wages rising at the fastest pace in nearly 10 years and GDP growth of above 3% in the past two quarters. This leaves policymakers in little doubt that interest rates need to continue to rise gradually, which translates to about one hike a quarter. As the Fed last raised rates at its September meeting, it is widely anticipated to keep the target range for the federal funds rate at between 2.00% and 2.25% on Thursday, with expectations high for another hike in December.

fed funds target rate

With no press conference scheduled for the November meeting, and no new dot plot chart either for investors to dissect, all the attention will be on the wording of the Fed’s statement. FOMC members will likely deviate slightly from the previous statement to note the slower growth in the third quarter. They may also point to some increased downside risks from the ongoing trade tensions and some tightening in financial conditions following the sharp losses in US stocks during October. However, given that the US economy continues to produce strong jobs growth and the core PCE price index (the Fed’s preferred inflation gauge) has stood at 2% for the past five months, the Fed is not expected to put too much weight on the negative developments since the last meeting.

Should FOMC members tread carefully with their words and the meeting proves to be a non-event, the dollar will likely drift sideways until the next risk event. But if the Fed plays down the recent equity rout and sets a more optimistic tone about the outlook, ignoring President Trump’s criticism that rates are rising too fast, the dollar could receive fresh impetus to advance higher.

Dollar/yen is facing immediate resistance at around 113.35, which is just above the 61.8% Fibonacci retracement of the downleg from 114.54 to 111.36. A hawkish statement would help the pair break above that level, with the next resistance coming from 113.86 – the 78.6% Fibonacci level. A climb above that barrier and the 114 handle would bring into focus the October top of 114.54.

usd/jpy forex 07112018

In the event, however, that the Fed unexpectedly sounds a slightly downbeat note due to the recent meltdown on Wall Street and the weakening global growth outlook, the dollar could come under sudden selling pressure. Such a shift would raise the possibility of the Fed slowing or even pausing its planned rate increases.

A downside move could see dollar/yen finding immediate support at the 50% Fibonacci at 112.95. Further south, the 38.2% Fibonacci is the next key support to watch at 112.57. Steeper losses could pull the pair towards the 23.6% Fibonacci at 112.11, putting the 112 handle at risk.

Whatever the tone of the statement, however, the odds of a December rate hike will remain high and the focus will increasingly become what happens after that. Looking into 2019, how the economy performs will depend on how far Trump will push his trade fight with China, as well as on how well he cooperates with a Democratic-controlled House, following Republican losses in the midterm elections.

by Raffi Boyadjian, XM Investment Research Desk

Raffi graduated from the London School of Economics in 1999 with a BSc in Business Mathematics and Statistics. Following graduation, he joined PricewaterhouseCoopers in the Business Recoveries team, where he was responsible for handling the process lifecycle of companies in liquidation.

In 2007, Mr Boyadjian joined Thomson Reuters, covering the Greek-speaking markets for the collection and analysis of company data and corporate news, and he was later promoted to Senior Analyst. In this position, he was responsible for quality control and training delivery. In 2012, he pursued his career as a Data Specialist with responsibilities including for global project coordination, writing user documentation, data analysis and quality enhancement.

Mr Boyadjian joined XM in 2015 as Investment Analyst and completed the in-house training on technical analysis. He is responsible for writing daily market reviews and forex news.

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