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EURUSD: Trading the Federal Open Market Committee Rate Decision

By , Currency Analyst
12 March 2012 20:15 GMT

Trading the News: Federal Open Market Committee Interest Rate Decision

What’s Expected:

Time of release: 02/13/2012 18:15 GMT, 14:15 EST

Primary Pair Impact: EURUSD

Expected: 0.25%

Previous: 0.25%

DailyFX Forecast: 0.25%

Why Is This Event Important:

Although the Federal Open Market Committee is widely expected to uphold its current policy in March, the statement accompanying the rate decision may prop up the U.S. dollar should the central bank talk down speculation for another large-scale asset purchase program. Indeed, the slew of positive developments coming out of the world’s largest economy may encourage the FOMC to endorse a wait-and-see approach throughout 2012, and we may see Fed Chairman Ben Bernanke continue to soften his dovish tone for monetary policy as central bank officials expect to see a more robust recovery this year. However, as Mr. Bernanke continues to highlight the ongoing weakness in the housing market, the central bank head may look to extend ‘Operation Twist,’ and the committee may hold off on QE3 as growth and inflation pick up.

Recent Economic Developments

The Upside

Release

Expected

Actual

Change in Non-Farm Payrolls (FEB)

210K

227K

Consumer Credit (JAN)

$10.450B

$17.776B

Consumer Price Index (YoY) (JAN)

2.8%

2.9%

The Downside

Release

Expected

Actual

Personal Spending (JAN)

0.4%

0.2%

Durable Goods Orders (JAN)

-1.0%

-4.0%

Advance Retail Sales (DEC)

0.3%

0.1%

The ongoing improvement in the labor market paired with the stickiness in price growth certainly dampens the Fed’s scope to push through another round of quantitative easing, and less dovish comments from the FOMC could spark a sharp selloff in the EURUSD as the pair appears to be completing a head-and-shoulders –and-shoulders top in March. However, the Fed may keep the door open to expand monetary policy further amid the slowdown in private sector consumption paired with the protracted recovery in the housing market, and the central bank may keep QE3 on the table in an effort to spur a stronger recovery. In turn, speculation for additional asset purchases may lead the EURUSD to retrace the decline from earlier this month, and we may see the exchange rate make another run at the 50.0% Fibonacci retracement from the 2009 high to the 2010 low around 1.3500 as market participants increase bets for more quantitative easing.

Potential Price Targets For The Rate Decision

EURUSD_Trading_the_Federal_Open_Market_Committee_Rate_Decision_body_ScreenShot004.png, EURUSD: Trading the Federal Open Market Committee Rate Decision

How To Trade This Event Risk

Trading the given event risk may not be as clear cut as some of our previous trades as the FOMC preserves its current policy, but a less dovish statement could set the stage for a long U.S. dollar trade as market participants scale back bets for additional monetary support. Therefore, if the central bank refrains from mentioning QE3, we will need to see a red, five-minute candle following the announcement to generate a sell trade on two-lots of EURUSD. Once these conditions are met, we will set the initial stop at the nearby swing high or a reasonable distance from the entry, and this risk will establish our first target. The second objective will be based on discretion, and we will move the stop on the second lot to cost once the first trade reaches its mark in an effort to preserve our profits.

In contrast, the protracted recovery in the housing market paired with slowdown in private sector consumption may dampens the Fed’s outlook for the real economy, and the central bank may keep the door open to expand its balance sheet further in an effort to stem the downside risks surrounding the region. As a result, if the FOMC shows an increase willingness to push through another large-scale asset purchase program, we will implement the same strategy for a long euro-dollar trade as the short position mentioned above, just in the opposite direction.

Impact that the FOMC Interest Rate decision has had on USD during the last meeting

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

JAN 2012

01/25/2011 17:30 GMT

0.25%

0.25%

+80

+88

January 2012 Federal Open Market Committee Interest Rate Decision

EURUSD_Trading_the_Federal_Open_Market_Committee_Rate_Decision_body_ScreenShot003.png, EURUSD: Trading the Federal Open Market Committee Rate Decision

The Federal Open Market Committee stuck to its current policy stance in January, but pledged to retain the zero-interest rate policy ‘at least through late 2014’ in an effort to encourage a stronger recovery. The dovish rhetoric by the central bank weighed on the dollar, with the EURUSD climbing back above 1.3050, and the reserve currency continue to lose ground throughout the North American trade as the exchange rate settled at 1.3104 at the end of the session.

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong

To be added to David's e-mail distribution list, send an e-mail with subject line "Distribution List" to dsong@dailyfx.com.

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12 March 2012 20:15 GMT