The Federal Reserve (Fed) will announce its decision on monetary policy today at 18:00 GMT. Chairman Jerome Powell will read a statement and hold a press conference at 18:30 GMT.
The Fed is expected to keep the Fed Funds rate unchanged at 0.00-0.25%. Earlier today, Q1 GDP data showed the terrible consequences of the coronavirus on growth. The economy contracted by 4.8%. Powell will likely comment on those numbers. To mitigate the impact the Fed cut interest rates back to 0.00 – 0.25% back on March 15, a level not seen since 2015 to. Since the beginning of the crisis launched different liquidity facilities, among other measures.
Analysts at TD Securities point out the Fed has already moved aggressively on the funds rate, QE, and lending programs. “The latter are the main focus now and will probably be modified further over time, but we are not expecting any major announcements on Wednesday. The tone will almost certainly remain dovish, however, and the Fed’s balance sheet is likely to keep growing rapidly.” Powell could offer some guidance regarding the balance sheet that rose by 2.3 trillion dollars since March to more than $6.5 trillion.
Negative rates are not mentioned in analyst’s reports so far. Most of them consider the central bank does not what rates beyond zero at the moment.
Implications for EUR/USD
The American dollar weakened over the last sessions on the back of an improvement in risk sentiment and despite higher US yields. EUR/USD rebounded from 1.0725 to near 1.0900 but then pulled back. Ahead of the meeting, it is trading around 1.0850. Accrdoing to TD Securities analysts the base case is that the Fed notes dramatic weakening and reiterates it will use its full range of tools and that Powell expresses optimism that actions to date will help the recovery process but emphasizes that more easing will occur as needed. Under such scenario, the greenback should not move far from current levels.
If the Fed, unexpectedly signals that the easing it has introduced is enough, the US dollar could rally and equity prices should drop. It would be a hawkish meeting, unlikely at the moment. If the EUR/USD slides, the critical level to watch is 1.0770: a daily close below should open the door to more losses.
More easing measures from the Fed could weigh on risk sentiment and on the greenback. Considering all the Fed has been doing, market participants do not expect bold announcements. Strong guidance could turn the meeting to the dovish side that could weaken the greenback. On the upside, the key level for EUR/USD is the 1.0860/1.0900 band, a horizontal resistance and also the 20-day moving average that capped the upside over the last few days. A close above, should lead to further gains and probably to a test of the April high at 1.0990.
About the interest rate decision
With a pre-set regularity, a nation’s Central Bank has an economic policy meeting, in which board members took different measures, the most relevant one, being the interest rate that it will charge on loans and advances to commercial banks. In the US, the Board of Governors of the Federal Reserve meets at intervals of five to eight weeks, in which they announce their latest decisions. A rate hike tends to boost the local currency. A rate cut tends to weaken the local currency. If rates remain unchanged (or the decision is largely discounted), attention turns to the tone of the FOMC statement, and whether the tone is hawkish, or dovish over future developments of inflation.
About the FOMC statement
Following the Fed’s rate decision, the FOMC releases its statement regarding monetary policy. The statement may influence the volatility of USD and determine a short-term positive or negative trend. A hawkish view is considered as positive, or bullish for the USD, whereas a dovish view is considered as negative, or bearish.