Forex Today: Fed rate decision, revised dot plot to trigger next big action
Here is what you need to know on Wednesday, December 18:
Financial markets remain quiet midweek as investors stay on the sidelines while getting ready for the Federal Reserve (Fed) to announce its monetary policy decisions following the last meeting of the year. During the European trading hours, Eurostat will release revisions to Harmonized Index of Consumer Prices (HICP) readings for November. Ahead of the Fed decision, November Housing Starts and Building Permits data will be featured in the US economic docket.
US Dollar PRICE Last 7 days
The table below shows the percentage change of US Dollar (USD) against listed major currencies last 7 days. US Dollar was the strongest against the Canadian Dollar.
| USD | EUR | GBP | JPY | CAD | AUD | NZD | CHF | |
|---|---|---|---|---|---|---|---|---|
| USD | 0.17% | 0.53% | 1.00% | 1.09% | 0.93% | 0.95% | 1.06% | |
| EUR | -0.17% | 0.36% | 0.82% | 0.91% | 0.76% | 0.77% | 0.87% | |
| GBP | -0.53% | -0.36% | 0.45% | 0.55% | 0.40% | 0.41% | 0.50% | |
| JPY | -1.00% | -0.82% | -0.45% | 0.09% | -0.06% | -0.05% | 0.05% | |
| CAD | -1.09% | -0.91% | -0.55% | -0.09% | -0.15% | -0.14% | -0.05% | |
| AUD | -0.93% | -0.76% | -0.40% | 0.06% | 0.15% | 0.02% | 0.11% | |
| NZD | -0.95% | -0.77% | -0.41% | 0.05% | 0.14% | -0.02% | 0.10% | |
| CHF | -1.06% | -0.87% | -0.50% | -0.05% | 0.05% | -0.11% | -0.10% |
The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the US Dollar from the left column and move along the horizontal line to the Japanese Yen, the percentage change displayed in the box will represent USD (base)/JPY (quote).
In the absence of high-impact data releases and fundamental drivers, major currency pairs fluctuated in relatively tight ranges on Tuesday. The US Dollar (USD) Index posted small gains but failed to stabilize above 107.00. Early Wednesday, the index moves sideways near 106.80, while the benchmark 10-year US Treasury bond yield holds steady slightly below 4.4%. The Fed is widely expected to lower the policy rate by 25 basis points (bps) to the range of 4.25%-4.5%. The revised Summary of Projections (SEP), also known as the dot plot, published alongside the policy statement will provide important clues about how many more rate cuts Fed officials project in 2025. Finally, Fed Chairman Jerome Powell will speak on the policy outlook and respond to questions in a press conference starting at 19:30 GMT.
The data published by the UK's Office for National Statistics showed that annual inflation, as measured by the change in the Consumer Price Index (CPI), rose to 2.6% in November from 2.3% in October. This reading came in line with the market expectation. In the same period, the core CPI rose 3.5%, up from the 3.3% increase recorded in October but below analysts' estimate of 3.6%. On a monthly basis, the Retail Price Index rose 0.1%, while the Producer Price Index - Input remained unchanged. GBP/USD largely ignored these figures and was last seen trading at around 1.2700.
EUR/USD extends its sideways grind slightly above 1.0500 after posting marginal losses on Tuesday.
USD/JPY corrected lower and snapped a six-day winning streak on Tuesday. The pair holds its ground early Wednesday and trades at around 153.50.
Gold failed to make a decisive move in either direction on Tuesday and closed the day little changed. XAU/USD remains confined in a narrow channel below $2,650 in the early European session on Wednesday.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates. When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money. When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions. The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system. It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.