Fed to Leave Rates Unchanged in July

U.S. Central Bank Expected to Raise Rates Once in 2016

The U.S. Federal Reserve was at one time forecasting up to 4 rate hikes in 2016. Macroeconomic headwinds have pushed that number down and after the Brexit impact there were rumblings of a rate cut being more likely. A month after British voters decided to leave the E.U. Fed funds rates are again being priced in with at least 1 rate hike before the end of the year.

The Fed is facing moderate growth in the U.S. and the timing of its next interest rate hike will be affected by the ongoing presidential electoral campaign. The Federal Open Market Committee (FOMC) meeting in July due to not featuring a press conference following the release of the statement had always been an unlikely candidate. The September meeting has 20 percent probability and the last meeting of the year on December 14 has over 50 percent with the added benefit of not interfering with the presidential elections.

The Federal Open Market Committee (FOMC) statement will be released on Wednesday, July 27 at 2:00 pm EDT. There is no change expected to the Fed benchmark rate and since this monetary policy meeting is not followed by a press conference the language in the statement will be the main focus as analysts try to gleam insight from the document.

The EUR/USD has lost 0.035 in the past 24 hours. The single currency is trading at $1.0990 after the U.S. dollar received a boost from the consumer confidence data released by the Conference Board. The household survey showed an improvement in consumer confidence up to 97.3 well above the forecast and inline with the past month’s print despite the Brexit aftermath.

The Fed is not expected to make the first move as other central banks have more mounting pressure to act. The USD would gain from further easing from Europe, Japan or the United Kingdom. The European Central Bank (ECB) held interest rates and its quantitive easing (QE) on hold as expected on Thursday, July 21. The EUR is weaker against major pairs after there was not clear signal on what the next step for the central bank is despite the anticipated negative effect of the Brexit vote on European growth by forecasters.

The Fed has been forced to relive 2015 where more was expected from the market but in the end only one rate hike materialized. The U.S. economy continues to be the one that is growing at a slow but steady pace in comparison to other major economies battling deflation.

The USD will be directly impacted by the language used in the FOMC statement. Investors will be going through the documents trying to get insights on the Fed’s view on the jobs market, inflation, growth and global events. Another point to consider is the vote split. Kansas City Fed President Esther George dissented in March and April but rejoined the hold camp in June. Given the positive signs form the U.S. economy and the limited impact of the Brexit shock she might once again push for a rate hike in July breaking rank with the rest of Fed FOMC voting members.

Market events to watch this week:

Wednesday, July 27
4:30 am GBP Prelim GDP q/q
8:30 am USD Core Durable Goods Orders m/m
10:30 am USD Crude Oil Inventories
2:00 pm USD FOMC Statement
2:00 pm USD Federal Funds Rate
Thursday, July 28
8:30 am USD Unemployment Claims
Tentative JPY Monetary Policy Statement
Friday, July 29
1:00 am JPY BOJ Outlook Report
Tentative JPY BOJ Press Conference
8:30 am CAD GDP m/m
8:30 am USD Advance GDP q/q

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza