Market participants and currency traders will focus on the Fed’s interest rate decision today. The Federal Reserve’s Open Market Committee (FOMC) will announce its rate decision at 2 p.m. Eastern time on 31 January. A press conference with Chairman Jerome Powell will follow at 2:30 p.m. to discuss the FOMC’s rate decision and further insights into the central bank’s outlook.
What to expect from today’s Fed meeting?
The Fed is expected to hold the policy rate steady at 5.25%-5.5% after the first meeting of the year. The US dollar has remained resilient especially after a number of Fed policymakers pushed back against expectations for a rate cut in March.
According to CME FedWatch tool, the possibility of a rate reduction in March has now dropped from 80% earlier in the month to almost 40% heading into the Fed meeting. The USD Index (DXY), which tracks the value of the US dollar against a basket of six major currencies has gone up 2% in January.
How will the dollar react?
If Fed Chairman Jerome Powell or the policy statement refer to the extension of the disinflationary process without clarifying that there won’t be a rate cut in March, then the greenback could weaken, and this will allow GBP/USD to find support.
On the other hand, the USD could strengthen if the Fed confirms a delay in changing the monetary policy by quoting the better-than-expected growth figures for the fourth quarter and relatively tight conditions in the jobs market.
Economists at ING also noted that the Fed won’t be rushing into discussions of rate cuts. With expectations of a rate cut in March having diminished due to the incoming strong data, they believe that the Fed’s message today will be “one of patience” which means that the dollar will remain supported.
The Federal Reserve has mentioned that it expects three rate cuts in 2024, but some Wall Street economists are anticipating five cuts throughout the year.
Consumers and businesses will welcome the rate cuts after they have been burdened with higher rates for mortgages, auto loans, credit card debt and other borrowing due to the Fed’s rate hikes. However, they may have to wait for a little bit longer as Wall Street is expecting the Fed to hold rates steady on Wednesday, with the first cut to come in March.
The Fed is cautious, as it doesn’t want to keep rates high for very long, but it also doesn’t want to cut them prematurely and risk inflation rising again. Analysts anticipate the Fed to maintain rates steady for a few more months until they form a clearer picture of how the economy is doing. David Kelly, chief global strategist at J.P. Morgan Asset Management, noted that the Fed may want to “douse hopes of any early easing in policy, … because they are genuinely uncertain about how sticky inflation might be in an economy experiencing above trend economic growth and a still very tight labour market.” As economists have noted, the Fed will be careful with its language on Wednesday and avoid sending a clearcut signal.