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Will Fed keep odds of another hike in December alive?

November 1, 2023| Forex Market


  • The Federal Reserve is widely expected to leave its policy rate unchanged at 5.25%-5.5%.
  • Fed Chairman Jerome Powell will speak on the policy outlook in the post-meeting press conference. 
  • The US Dollar valuation could be impacted by the statement language and FOMC Chairman Powell’s comments.

The Federal Reserve (Fed) is expected to leave its policy rate unchanged at the range of 5.25%-5.5% for the second consecutive time in November. The decision will be announced at 18:00 GMT and FOMC Chairman Jerome Powell will speak on the policy outlook and respond to questions in the post-meeting press conference, starting at 18:30 GMT.

Follow our live coverage of the Fed’s monetary policy announcements and the market reaction.

The market positioning suggests that a no change in the Fed’s policy rate is fully priced in. However, investors still see a nearly 20% probability that the Fed will opt for one more 25 basis points (bps) interest-rate hike before the end of the year, as per the CME Group FedWatch Tool.

Economists at ABN Amro said that the Fed has reached the end of its tightening cycle and explain:

“We think July was the last hike of the cycle, and that benign core inflation readings will give the FOMC the confidence to keep policy on hold over the coming months.”

“We continue to expect the Fed to start cutting rates from next March. Falling inflation will push real rates higher, and the recent jump in bond yields also represents a significant tightening in financial conditions.”

When will the Fed announce policy decisions and how could they affect EUR/USD?

The Federal Reserve is scheduled to announce its interest rate decision and publish the monetary policy statement at 18:00 GMT. This will be followed by the post-meeting FOMC press conference at 18:30 GMT. Investors expect the Fed to leave the policy rate unchanged, while seeing a small chance of one more rate hike in the last policy meeting of the year in December. 

Following the Fed’s decision to stand pat on rates in September, the benchmark 10-year US Treasury bond yield has climbed from 4.3% to 5%. Although the rise in yields was largely driven by the selling pressure surrounding the Treasury bonds on government shutdown fears, it caused a further tightening of financial conditions. In his most recent public appearance at the Economic Club of New York, Chairman Powell acknowledged that higher bond yields could have implications for the policy and added that they could take some pressure off of the Fed to raise rates.

Meanwhile, recent data releases from the US reaffirmed tight conditions in the labor market and the strength of the economy. Nonfarm Payrolls rose by 336,000 in September, the biggest one-month increase since January, and the US economy grew at an annualized rate of 4.9% in the third quarter.

FOMC speech tracker: Balanced approach ahead of November 1 meeting

Federal Reserve officials modeled their vocabulary towards a more balanced approach on their public appearances during late September and October, before the 10-day blackout period ahead of their November 1 FOMC meeting and interest rate decision. Balanced remarks, even by FOMC policymakers who had been leaning clearly hawkish recently such as Neal Kashkari or Loretta Mester, were more frequent this time around. At the same time, some board members who had been more balanced during the spring and summer, have leaned more dovish in the fall, like Christopher Waller or Patrick Harker.

That said, the general tone going into the meeting is quite balanced, well represented by Fed Chair Jerome Powell speech at the Economic Club of New York on October 19 and the last eight recorded appearances from Fed members having been had a generally balanced tone.

*Voting members in 2023.

FOMC speech counter

  TOTAL Voting members Non-voting members
Hawkish 5 4 1
Balanced 16 8 8
Dovish 6 5 1

This content has been partially generated by an AI model trained on a diverse range of data.

In case the Fed shuts the door to a December rate hike, the market positioning suggests that the US Dollar (USD) could weaken further against its rivals with the initial reaction. On the other hand, a hawkish tone could revive expectations for one more increase and provide a boost to the USD. Powell might cite the above-mentioned data and argue that the economy is healthy enough to handle additional tightening.  

In case the Fed adopts a neutral stance and reiterates the data-dependent approach, investors could refrain from taking large positions ahead of Friday’s jobs report.

Analysts at TD Securities provide a brief preview of the potential market reaction to the Fed’s policy decisions:

“For the Fed, they will strike a hawkish tone, but we think the bar is higher for them to actually move the market. Markets are fully priced for US exceptionalism, and we note the decoupling of US macro trends and the US 10y yield.”

“We expect softer US data this week and another round of strong China data. With the USD running a new cyclical risk premium and long positioning quite elevated, the USD should struggle to hold onto recent gains this week.” 

Eren Sengezer, European Session Lead Analyst at FXStreet, shares his technical outlook for EUR/USD: “The Relative Strength Index (RSI) indicator on the daily chart declined below 50 and EUR/USD fell below the 20-day Simple Moving Average (SMA) early Wednesday, pointing to a bearish tilt in the short-term outlook.”

Eren also points out the key levels for the pair: “1.0500 (psychological level, static level) aligns as first support for the pair before 1.0450 (end-point of the July-October downtrend) and 1.0400 (psychological level, static level). On the upside, resistances are located at 1.0650 (20-day SMA, Fibonacci 23.6% retracement), 1.0750 (Fibonacci 38.2% retracement) and 1.0800 (100-day SMA, 200-day SMA).”

Interest rates FAQs

Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%.
If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.

Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.

Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank.
If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.

The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure.
Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.

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