Finally the day we all expected during the first part of the week is here and of course we’re talking about the FOMC meeting today on monetary policy. We’ve been talking about this meeting all week because we regard this meeting not only as the most important event of the current week but also because we believe it could be a key turning point for the US Dollar and the rest of the global money markets.
Today the Fed will decide on whether to change their key interest rate levels and even though we know that there will be no change in policy this time we’re more interested in the press statement that will follow. You see we already know that the US central bank wants to raise rates sometime this year and the way they will articulate their forward guidance will offer crucial insight on the timeline here. We could be looking at a September hike or the Fed might opt for pushing hiking towards December.
The US Dollar stands to gain significantly if today’s press statement hints towards a September raise and they only reason to doubt such a development would be the stock market meltdown in China. So if the language used by the Fed reveals some doubts and reservations then we might see the Dollar losing ground as traders would interpret that as a sign of weakness that would point towards a later date for hiking. On the other hand, a confident statement acknowledging the situation in China but offering a positive outlook for the Dollar would send it higher as the Fed would hint towards a rate hike soon.
Taking a look at the recent price action, the Euro attempted to break lower yesterday but there was enough support to key the currency pair well bid. However the recovery didn’t produce a new high, a sign that traders prefer not to take any serious positions just hours before the FOMC meeting. The Euro stands to lose significant ground if the Fed meeting hints towards a rate hike soon and the 1.0900 area might come into focus quickly if that’s the case. On the other hand, a disappointing and reserved Fed statement should push the Euro towards the 1.1200 area.
The Cable contrary to the Euro printed a new high yesterday lifted by the better than expected GDP release. The UK currency rallied above the 1.5600 barrier over the past 24 hours but again there was limited follow-through above this area as traders are looking towards today’s event before committing. Should the Fed appear committed to raising rates soon the Cable could retreat towards the 1.5500 area while a bearish statement should propel the currency towards 1.5650.