Octa research: Fed interest rate decision on hold—U.S. dollar weakens

• The Federal Open Market Committee (FOMC) kept rates stable during its last meeting in November 2023 and its previous meeting in September.
• During the event at Spelman College in Atlanta, Powell said that the key inflation rate averaged 2.5% in the six months up to October, close to the Fed's target of 2.0%. 'We are getting what we wanted to get.'
• The Fed's base case scenario seems to have shifted towards keeping rates at current levels, potentially leading to a fall in USDJPY to the 140.00–142.00 range by the end of 2023.

During the previous Federal Open Market Committee (FOMC) meeting, the Federal Reserve (Fed) held the key rate at 5.25%–5.5%. The next FOMC meeting will take place on 12 – 13 December 2023 and will be one of the key economic events of the year. The market expected the Fed to keep rates steady at a target of 5.25%–5.50%.

At the last FOMC meeting held on 31 October – 1 November, interest rates remained unchanged at 5.25%–5.50%. That move gave the Fed additional time to assess whether the inflation was contained and whether high interest rates hindered economic growth. 

At a speech on 1 December during the event at Spelman College in Atlanta, Fed Chairman Jerome Powell offered optimism, noting that the key inflation indicator averaged 2.5% in the six months to October, close to the Fed's 2% target. 'We are getting what we wanted to get', Powell said, pointing out that the 'full effects' of the Fed's 5.25% of rate hikes to date have likely not yet been felt.

'Clearly, U.S. monetary policy is slowing the economy as expected,' said Kar Yong Ang, the Octa financial market analyst. 'Given the market sentiment and the rhetoric of the U.S. Fed chair, a pause is highly likely to mark the end of the monetary tightening cycle,' he added.

According to the CME FedWatch Tool, the probability of a rate hike is 98.4%. If the key rate is maintained, the stock markets will be strongly supported, thereby making the U.S. dollar weaker and other major currencies stronger. USDJPY may decline to the 140.00–142.00 range by the end of 2023.