How the Next FOMC Meeting May Affect the Foreign-Exchange Market

On Nov. 2, the Federal Open Market Committee said that it would leave interest rates unchanged, which wasn't surprising.

There was heightened volatility in the overnight futures between Tuesday and Wednesday, and the Dow Jones Industrial Average and S&P 500 futures were down 4% at one point when Donald Trump was elected president.

However, by the open Wednesday, the S&P 500 and Dow Jones Industrial Average futures recouped most of their overnight losses and were down less than 0.50% in late morning.

Although the FOMC decided to leave rates unchanged, there are some comments that indicate a potential rate increase soon. The language was similar to that of the FOMC September meeting.

For most of this year, the Federal Reserve didn't seem like it knew what it was going to do and was just winging it.

Now, it makes sense that the Fed didn't raise rates at all up until this point because it is an election year, and there is a lot of uncertainty in this particular election. But now that Trump will be president, the Fed could start focusing on the actual economics of the U.S., rather than being afraid to spook the markets.

The most important statement at the FOMC's November meeting was, "The committee judges that the case for an increase in the federal funds rate has continued to strengthen but decided for the time being to wait for some further evidence of further progress toward its objectives."

However, the FOMC didn't explicitly say when it would raise rates, but market participants are looking for the Fed to raise rates at next month's meeting.

Market participants are pricing in a 66.8% probability that the Fed will raise rates next month, by 25 basis points, according to the CME Group 30-Day Fed Fund futures prices and the CME FedWatch Tool. 

Chart courtesy of CME Group 30-Day Fed Fund futures prices and the CME FedWatch Tool

The FOMC has maintained a zero-interest rate policy since late-2008, during the global financial crisis, up until last December, when it raised the federal funds target range by 25 basis points.

The U.S. jobs market has been trending up, and the October jobs report, which was released on Nov. 4, showed that the unemployment rate fell to 4.9% and wages rose significantly from a year earlier, the most since June 2009.

As shown in the chart below provided by Econoday, the unemployment rate has been in a downtrend since December 2012, and non-farm payrolls are still relatively strong.

Chart courtesy of Econoday

Although the job market has been strengthening, there is one thing that the FOMC is also looking at when it is making its decision regarding monetary policy and that is the inflation rate. The FOMC is looking for inflation to rise to its target rate of 2% before considering a rate hike, coupled with a strong labor force.

However, inflation remains below the 2% target, but that doesn't mean that the Fed can't change its mind and change its target inflation rate.

Because the dollar's value relies heavily on rates, it is a good idea to follow the foreign-exchange market, but the focus should be on the FOMC's December meeting. The U.S. Dollar Index is still in an uptrend, dating back to May and could strengthen near the key resistance level, just slightly above 100, if the FOMC decides to raise rates next month.

The U.S. Dollar Index fell more than 1% after Trump was elected, and there is still some uncertainty for the dollar.

Chart courtesy of TradingView

After Trump won the election, the currency pair, USD/MXN, spiked more than 8%, and it was bad news for the Mexican peso, which fell to record lows but rebounded slightly after the market was able to digest the news.

If the dollar strengthens and the FOMC raises rates next month and an individual is sending money from the U.S. to another country, the strong dollar will most likely benefit that person. However, if rates rise, the dollar will strengthen against other currencies, and transferring money could be costly.

Transferring money with banks and other money transfer companies has hidden fees, and they could charge people up to 5% in hidden fees. In the modern age, some companies and organizations are trying to solve this problem.

Other than world famous services such as PayPal or Skrill, there are companies such as TransferWise, which gives the real exchange rate while cutting out hidden fees. Blockchain technology-based Abra lets people send instant payments using their smartphones through a bitcoin infrastructure, but the funds are denominated in dollars.

Finally, bitcoins can be used for international transfers, and though this option might be a bit riskier, it is an excellent alternative for savvy users to cut down on costs and hidden fees.

In conclusion, market participants are expecting the FOMC to raise rates next month, which could increase the volatility in the foreign-exchange market. Trump's candidacy could be the deciding factor in terms of how the FOMC will decide on what it wants to do with U.S. monetary policy.

Trump is the president-elect, so market participants should focus on the foreign exchange, U.S. equity, U.S. Treasury and global markets.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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