FOMC statement: 4 FX pairs to trade after Fed interest rate hike

The Federal Reserve is expected to raise interest rates by 0.25% today. This would be the first rise since 2018 and comes after inflation hit a 40 year high at 7.9% in the United States last week. 

Here we look at what to expect from the Fed meeting and how to trade USDJPY, GBPUSD, DYX, and EURUSD following today’s FOMC rate decision and amidst Russia’s ongoing invasion of Ukraine.  

The Federal Reserve is expected to start reversing the economic help it provided during the coronavirus pandemic. Interest rates, inflation, the Russian invasion, and its balance sheet are likely to be the big discussions taking place. While some of what the Fed has in store is already priced into the market, traders will be keeping a lookout for any surprises. 

The Fed announced in January that interest rate rises were to be expected throughout the year. Today’s decision is likely to be the first of a series of hikes, with 25 basis points already priced into the market. Despite some speculation, a 50 basis point hike seems to be off the cards today, after Jerome Powell hinted it wouldn’t happen when he spoke last month.  

While a quarter point hike is almost guaranteed, traders will be more focused on what the Fed says about future rises. Many analysts expect seven increases in 2022, one at each meeting, although with inflation soaring and the Russian invasion causing massive uncertainty, anything is possible. 

The last time the Federal Open Market Committee gave their economic projections in December 2021, members forecast inflation would be at 2.7% for 2022. This was a massive miss, with it already hitting a 40-year high running at 7.9%. It is expected that the fed may raise the full year inflation figure to around 4%. 

Unemployment projections for the year were 3.5%, although some analysts suggest this could be lowered, especially as February’s unemployment figure came in at 3.8%. Adjustments to this year’s GDP figure are also likely to occur too. December’s data suggested GDP growth of 4% this year, although economists predict a number below 3%. 

As the FOMC’s two day meeting comes to an end later today, statements and economic projections will cause short term volatility in USD crosses. Below we’ve selected four currency pairs to trade following the Fed’s rate decision and statement. 

Source: TradingView

The yen weakened against the dollar last week, with the pair breaking higher after a sustained period trapped in a small triangle. Short-term bias remains bullish and a run towards a 2016 high at 118.66 looks a likely scenario.  

However, depending on what the Fed says, a straight push up may be preceded by a stop run to the upper end of the triangle, before a continuation of recent bullish momentum. If on the other hand, a dovish tone comes from the meeting, expect a pull back to the triangle or lower.

Source: TradingView

Cable continued its sell off last week, eventually breaking near term support at 1.3160. Monday and Tuesday’s trading saw sterling weaken, closing in on its next level at 1.2850 with the market showing dollar strength could be here to stay. 

A continuation lower could be possible following today’s data and statements, although GBPUSD may break higher to retest previous support, now resistance at 1.3160. There’s also a possibility that little reaction comes from today’s data, as traders could be waiting for tomorrow’s MPC rate decision.

Source: TradingView

The dollar index has continued to move higher as investors seek safety in the greenback amid turmoil in Europe. Up over 3% and closing in on $100, a level not seen since the start of the pandemic, any hawkish surprises from the Fed would likely see DXY charge towards resistance at 101.

The daily chart shows there’s a clear bullish bias pushing DXY higher, although a pull back could be anticipated following today’s news releases. The market is currently trading in a weekly timeframe imbalance which has yet to be filled. An initial push towards the top of the imbalance before a sell-off lower could be a possible trade idea. However, the imbalance could quite easily not hold, especially if traders react to today’s news by buying the dollar.

Source: TradingView

The Euro has continued its slide against the dollar despite a small pull back towards the end of last week. Monday and Tuesdays price action has been trapped within the previous weeks high and low with low volatility and a slow moving market. 

A run for either last week’s high or low could be expected following today’s news before the market decides which direction it wants to trade. Last week’s high also coincides with a previous swing low making it a strong target. Any break lower would most likely see price resume its bearish bias, targeting support at around 1.0770.

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