U.S. Dollar: A Look At 3 Scenarios Ahead Of The Fed Decision

Key Insights

• Traders are not ready for big moves in the forex market ahead of the Fed Interest Rate Decision. 
• Most players expect that the Fed will raise the rate by 75 bps. 
• We analyze three main scenarios and their potential impact on the dynamics of the American currency.

U.S. Dollar Is Mostly Flat Ahead Of The Fed

U.S. dollar is mostly flat in quiet trading, which is not surprising as traders are waiting for the Fed Interest Rate Decision.

Currently, the market believes that there is a 73.9% probability of a 75 bps hike. It should be noted that market’s expectations were mostly stable in recent days. There are some thoughts about a major 100 bps hike, but most players think that the Fed will choose to raise the target rate to 225 – 250 bps.

Interestingly, the yield of 10-year Treasuries remains under some pressure today. In recent trading sessions, the yield of 10-year Treasuries remained in the 2.70% – 2.80% range. A move out of this range will signal that government bond markets are ready to gain momentum. It is highly unlikely that anything material will happen ahead of the Fed’s announcement.

What Can Happen After The Fed?

There are three main scenarios. Let’s take a look at them one by one.

• The first scenario is the dovish one. The Fed raises the rate by 75 bps, accompanied by commentary about recession risks. Such a move will be viewed as dovish, and the U.S. dollar will likely find itself under pressure.
• The second scenario implies that the Fed raises the rate by 75 bps but says that inflation remains a serious risk. The focus on inflation will likely push the American currency to higher levels.
• The third scenario (a 100 bps hike) is the most interesting one. At first glance, this is the most hawkish scenario. However, the market may decide that the Fed decided to deal a big blow to inflation in summer and will stop raising rates in the remaining months of the year. Thus, the U.S. dollar may even find itself under pressure after the unexpected 100 bps hike.

For a look at all of today’s economic events, check out our economic calendar.