Breaking News
Ad-Free Version. Subscribe now to follow markets, faster and distraction-free. More details

Will FOMC Be Good Or Bad For The U.S. Dollar?

By Kathy LienForexSep 16, 2020 04:21
Will FOMC Be Good Or Bad For The U.S. Dollar?
By Kathy Lien   |  Sep 16, 2020 04:21
Saved. See Saved Items.
This article has already been saved in your Saved Items

Wednesday’s Federal Reserve monetary policy announcement is the most important event risk on this week’s calendar, but many investors are wondering how much impact it will have on the U.S. dollar. On Monday, the greenback traded lower against all of the major currencies on the expectation of dovishness, but today, the price action is mixed. The dollar extended its slide against the Japanese Yen but strengthened versus the euro. Other currencies, like sterling, the Canadian, Australian and New Zealand dollars, ended the day up versus the greenback but also descended from earlier highs, which means that during the New York session with the exception of USD/JPY, the dollar caught a bid.

Why are investors buying dollars? With stocks rising for the third day in a row, it's not because of risk aversion. Treasury yields are up slightly, which helped, but one of the main reasons is the sharp rise in the Empire State manufacturing index. Economists were looking for the index to rise to 6.9 from 3.7, but it leaped to 17. New York state’s low infection rate and continued reopening helped the manufacturing sector recover at its second fastest pace since 2018. While some states reported spikes in virus cases over the past month, it has not led to tighter lockdown measures, which means that the recovery continued.

When the Federal Reserve meets tomorrow, no changes in monetary policy are expected. The main focus will be its economic projections and dot-plot forecast. We know that the language in the FOMC statement will adjusted to account for the central bank’s new inflation strategy. In August, Chairman Jerome Powell announced a new framework that would allow inflation to overshoot the central bank's targets in order to attain long-term price stability. This new approach follows nearly a decade of inflation falling short of the 2% target. Its economic projections and dot plot could reflect these changes with lowered expectations for price growth and delayed tightening. However, the Fed may raise its growth outlook, which could be enough to drive the dollar higher because going into the rate decision, investors are positioned for dovishness.

Since its last policy meeting in late July, consumer spending softened, confidence declined and job growth slowed. However, there were improvements in the housing market and, according to the ISM surveys, manufacturing activity accelerated at a faster pace, while services stabilized. In fact, when Powell announced the Fed's new inflation strategy, the dollar soared instead of weakened for this very reason. Powell’s comments at the time also contained a tinge of optimism as he described the economy as healthy, apart from virus-hit areas. So we would not be surprised if the dollar gained strength on FOMC, but it won't be a smooth ride. Reductions in rate-hike expectations via the dot plot could drive the dollar initially, but it could end the day higher. U.S. retail sales will be released before the monetary policy announcement and could set expectations for the rate decision.

U.S. Economic Indicators.
U.S. Economic Indicators.

The strongest currencies today were the New Zealand dollar, Japanese Yen and Australian dollar. NZD rallied as relaxed lockdown restrictions eased and dairy prices ticked higher, while AUD perked up after the RBA minutes and on stronger Chinese data. UK and Canadian CPI reports are scheduled for release on Wednesday. According to the PMIs, inflationary pressures in the UK accelerated, while prices in Canada softened. With a Bank of England rate decision on this week’s calendar, UK data could have more impact on GBP than CAD data on the loonie.

Will FOMC Be Good Or Bad For The U.S. Dollar?

Related Articles

Kenny Fisher
USD/CAD Flat Ahead of Fed Decision By Kenny Fisher - Jul 29, 2020

After starting the week with losses, the Canadian dollar reversed directions. Currently, the pair is trading at 1.3371, down 0.05% on the day. There are no Canadian releases until...

Will FOMC Be Good Or Bad For The U.S. Dollar?

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at’s discretion.

Write your thoughts here
Are you sure you want to delete this chart?
Post also to:
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Are you sure you want to delete this chart?
Replace the attached chart with a new chart ?
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
Sign up with Email