How To Trade The Week’s Major Event: The FOMC Statement

The pace and timing of the coming US interest rate hikes is arguably the key issue for global markets, particularly for currencies and bonds. Here’s a simple beginner’s look at how to trade this

Since the start of the global debt and banking crisis in 2009, low interest rates from the leading central banks have been the primary support for the ongoing recovery. With many leading global stock markets and other risk assets at multi-year highs, markets fear a return to rising rates more than anything else.

Today we get the latest clues about rates from the world’s most important central bank.

 

Background

 

The US Federal Reserve Bank (“The Fed”) is widely believed to begin a multi-year move to raise its benchmark interest rates this year, perhaps as early as June, more likely in September or a bit later.

When US rates rise, they won’t just effect the USD and US economy. The USD is the most widely traded currency, and the US economy is the largest in the world. Thus virtually all global asset markets move with changing expectations about the timing and size of the coming rate hike, as well as its likely duration, pace.

Today’s FOMC (Federal Open Market Committee – which sets Fed policy) statement is the primary way that the Fed communicates hints about how it views the US economy, as well as the size and timing of the coming interest rate hike.

 

Why Today’s FOMC Monthly Statement Is The Most Potentially Market Moving Event This Week

 

In sum, investor outlook on the size and date of the first increase is arguably the most important single driver of global markets, and today’s FOMC statement is the latest and best source of clues on the coming Fed interest rate increase.

It is even more important than usual because most traders believe that a USD rate hike coming between June and September. This belief has influenced trader positioning in most global markets. For example, it has helped drive the USD higher over the past months against most currencies, especially the EUR.

However recent US economic data has not been strong, and Fed governors have often spoken about delaying a rate hike out of fear that a rate hike could hurt the US’s economic recovery.

Fears that the Fed could delay the coming rate hike are a key reason why the USD has fallen versus other currencies and assets priced in US dollars, such as precious metals.

 

Ideas On How To Trade The Fed Meeting

 

Those who want to trade the release of the FOMC statement need to consider the following:

The key question today is whether or not the wording of FOMC’s monthly statement will imply that the FOMC has ruled out an interest rate increase in June.  It could do this by:

  1. –Emphasizing the negatives like the recent disappointing US economic data such as: manufacturing and services activity, employment, and core price growth that threatens a coming wave of deflation. They could also express worry about the USD’s strength in the past 10 months – implying they might want to cool rate increase expectations and thus pull the US dollar lower.

If that happens, the likely market reactions could include:

  1. -The 3-week USD pullback could continue, with forex market results such as:
    1. –The EURUSD could test 1.10 resistance zone.
    2. –The USDJPY could test the 118 support area.
  2. -Major global stock indexes, particularly those in the US, could rally because low rates support higher stock prices.
  3. -USD priced commodities like gold, silver, and oil might also get a boost.
  1. If however, the report is positive enough to maintain expectations for rising rates between June and September, any USD pullback related moves could be avoided. Indeed, we’d probably see at least a brief USD “relief bounce” higher.

 

The EURUSD and USDJPY charts below show our take on the likely trading range for the coming days, depending on how markets interpret the FOMC statement.

 

ScreenHunter_01 Apr. 29 09.41

 

EURUSD (left) and USDJPY (right) 4-hour charts. Estimated trading range for the coming days in red, drawn broadly as actual price action could vary greatly depending on market response to the FOMC statement.

Source: MetaQuotes Software Corp, www.FXGlobe.com

01 Apr. 29 09.41.jpg

 

Most still believe that a rate hike is coming between June and September, and this view has been supported by recent comments from Fed officials. They’ve mostly dismissed recent weak data as temporary, fluctuations, saying the long term trend for the US economy continues to improve.

The prior FOMC statement neither signaled nor ruled out a June rate increase, so the Fed could just leave the monetary policy statement wording unchanged.  That should halt the USD’s slide and provide a short term bounce.

In Sum

 

The safest approach is to wait for the FOMC statement to be released before taking a trade.

  1. -If we get a pessimistic FOMC statement (implying possible delay in a rate hike), then:
    1. –Short term and day traders should consider trying to play a 2 – 3 day downside move for the USD vs. the EUR, JPY, GBP, etc., as noted above.
    2. –Longer-term traders would likely benefit from using the USD weakness to buy the dollar at a lower level.
  2. If (as we expect) markets see no policy change in the FOMC statement, then we’ve the opposite situation:
    1. -Short term traders should look to ride a brief USD rally.
    2. -Longer term traders should continue with trades that benefit from the long term USD rally

 

Questions? Contact us at fxglobe.com or call one of our trained trading professionals to assist you. We’re here to help you. Your success is ours!

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DISCLOSURE: The above represents the personal opinion of our Chief Analyst, and is not represented as any guarantee of what will happen by him or fxglobe.com. Trading involves risk, even for those familiar with sound risk management techniques such as those presented in Chapter 5 of Cliff’s book, The Sensible Guide To Forex. Final responsibility for all trade decisions rests with the trader.

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