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US Interest Rate Decision: What the FOMC’s Call Could Mean for the USD

The US interest rate decision will come into focus at 18.00GMT on Wednesday September 18, 2019, when the Federal Open Markets Committee (FOMC) of the US Federal Reserve will its decision public. This will be followed 30 minutes later by the FOMC Chairman’s statement. The markets have fully priced in a further 25bps “insurance cut”, and would also be expecting the Fed Chairman to provide an indication for further cuts in 2019 and 2020.

The FOMC may probably be as divided as they were the last time. The minutes of the last meeting where there was a 25bps rate cut showed the line of division very clearly.

We have on one side, the vociferous supporters of an aggressive easing cycle, egged on by none other than US President Donald Trump. Trump has made it a habit to call out the Fed Chair on Twitter and as recently as yesterday, renewed his calls for a very aggressive rate cut regime to make the US Dollar cheaper and its exports more competitive, relative to its peers. John Williams, the President of the New York Fed as well as the Vice Chairman Richard Clarida, are on this bus. This bus has those who are seeing what is going on around the globe: signs of global recession which is already forcing central banks in Europe, New Zealand, Singapore, Brazil, Turkey, Indonesia and possibly Australia, to take the easing pathway so as to prepare for the coming rainstorm. This group wants pro-active measures taken by loosening monetary policy.

Then we have those who believe that focus should be on the local economy and not the global one: hawks like Eric Rosengren and Esther George who voted not to cut rates the last time. They look at the recent manufacturing/services sector data, consumer confidence, inflation data, payroll growth, as well as relatively low unemployment rates (despite disappointing August NFP figures) and they say: “hey, why do we need to cut rates when things look good locally?”

But then we have the FOMC Chair himself, who has tended towards ambiguity and equivocation in recent statements, irking Donald Trump in the process and making himself the target of repeated Twitter onslaughts from the POTUS.

FOMC Decision Outcomes

If the Fed cuts by more than 25bps, this would be seen as a dovish event for the USD and a selloff on the USDJPY and USDCHF could be seen.

A 25bps cut would probably lead to a muted bullish response on the USD, but the accompanying statement by the FOMC Chair Jerome Powell would be the event to watch to provide further direction for these currency pairs.

A less than dovish statement may lead to further USD demand, leading to a stronger buying response on the USD, while a dovish statement could produce broad-based USD selling. It is now left for traders to answer the question: what would be the words to be used by Fed Chair Powell to indicate a dovish or less-than-dovish (as opposed to outrightly hawkish) tone?

My preferred currency pair to trade this event is the USDJPY and USDCHF, in that order. This would allow me to trade the USD, insulated from any news related to Brexit or the EU stimulus situation.