The Market Impact of FOMC Meetings Part 3

[WITH CODE] Analyzing the impact of FOMC meetings on returns and volatility across asset classes

Hello!

In my previous post on FOMC meetings, we examined how U.S. Treasury notes, long-term Treasury bonds, and interest rate volatility respond to policy announcements. This time, we shift the focus to currencies (FX) to see how the dollar behaves around these key events.

The results are even more striking and statistically significant.

Let’s get into it.

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U.S. Dollar Index and FOMC Meetings

We’ll begin by examining how FOMC meetings affect the U.S. dollar. Since currencies are always priced relative to one another, we need to analyze the dollar in terms of a basket of currency pairs to evaluate its performance as a standalone asset.

However, the performance of the dollar in any basket depends entirely on which currencies are included and how much weight each one carries. The most widely used benchmark is the U.S. Dollar Index (DXY), which tracks the dollar’s performance against a weighted group of major currencies. While DXY is the standard reference, it’s not directly tradable, though it can be accessed through derivatives like futures and options.

To analyze tradable dollar performance, we’ll use the UUP ETF (Invesco DB US Dollar Index Bullish Fund). UUP seeks to track the DB USD Index Bullish Futures Index, which holds long positions in ICE U.S. Dollar Index futures. These futures are based on DXY, so UUP tends to move closely with it.

Here are the DXY component weightings reflected in UUP’s futures exposure:

• Euro (EUR): 57.6%

• Japanese yen (JPY): 13.6%

• Pound sterling (GBP): 11.9%

• Canadian dollar (CAD): 9.1%

• Swedish krona (SEK): 4.2%

• Swiss franc (CHF): 3.6%

Now let’s look at how UUP performs around FOMC meetings, using daily data from mid-2007 through the end of 2024.

The methodology is consistent with the first and second posts in this series. Each trading day is categorized as one of four types:

• FOMC Meeting Day (decision day)

• Pre-FOMC (one trading day before the meeting)

• Post-FOMC (one trading day after the meeting)

• Non-FOMC (all other trading days)

The results surprised me, especially given how closely the dollar is tied to Fed policy expectations.