US Dollar Outlook Hinges On FOMC Guidance, Fed Balance Sheet

USD price action will be front and center during Wednesday’s trading session with the Federal Reserve scheduled to release its latest interest rate decision at 19:00 GMT. This will be accompanied by an update to the central bank’s quarterly economic projections and will be followed by Fed Chair Powell’s press conference due to start Wednesday at 19:30 GMT.


(Click on image to enlarge)

Chart of Federal Reserve Summary of Economic Projections and US Dollar Outlook

Source: Federal Reserve

I recently outlined how the US Dollar outlook is fixated on trade talks, the most recent jobs report and forward guidance provided by FOMC officials. The FOMC has slashed its policy interest rate by 0.75% so far this year after cutting the federal funds rate by 25-basis points at the last 3 consecutive Fed meetings (deemed a mid-cycle adjustment).

With the Fed relatively turning less-dovish since the end of October, which was highlighted in FOMC minutes from the most recent Fed meeting, USD price action could catch a bid if the Fed underscores its firming monetary policy stance. This will likely be conveyed in the updated summary of economic projections and the median target federal funds rate forecast in particular.


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Chart of FOMC Interest Rate Cut Probabilities and US Dollar Outlook

The Fed still appears slightly accommodative, however, judging by futures-implied probabilities for future FOMC interest rate cuts. Although the market is overwhelmingly expecting the Fed to stand pat on rates this December, rates traders are currently pricing in roughly 0.3% of easing over the next 12-months with a futures-implied target FFR of 1.323% by December 2020.

This compares to the current FFR target range of 1.50-1.75%. The convergence between currently priced market expectations and FOMC projections stands to overwhelmingly drive the direction of the US Dollar with the recent global rate cut cycle seemingly on pause.

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