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EURUSD: Trading the Federal Open Market Committee Rate Decision

By , Currency Strategist  and  , Currency Analyst
24 April 2012 19:40 GMT

Trading the News: Federal Open Market Committee Interest Rate Decision

What’s Expected:

Time of release: 04/25/2012 16:30 GMT, 12:30 EDT

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 anticipated to preserve its current policy stance in April, the fresh batch of central bank rhetoric paired with the updated forecasts for growth and inflation may prop up the U.S. dollar should the central bank highlight an improved outlook for the world’s largest economy. As the Fed takes note of the more robust recovery, the central bank may continue to talk down speculation for another round of quantitative easing, and we may see the committee bring its easing cycle to an end as the region gets on a more sustainable path. In turn, the FOMC may start to discuss a tentative exit strategy over the coming months, and the central bank may look to normalize monetary policy towards the end of the year as Fed officials anticipate to see a stronger recovery in 2013.

Recent Economic Developments

The Upside

Release

Expected

Actual

Advance Retail Sales (MAR)

0.3%

0.8%

Consumer Price Index Core (YoY) (JAN)

2.2%

2.3%

Average Weekly Earnings (YoY) (MAR)

1.9%

2.1%

The Downside

Release

Expected

Actual

New Home Sales (MoM) (MAR)

1.9%

-7.1%

Existing Home Sales (MoM) (MAR)

0.5%

-2.6%

Change in Non-Farm Payrolls (MAR)

205K

120K

The resilience in private sector consumption paired with the stickiness in underlying inflation may encourage the FOMC to drop its dovish tone for monetary policy, and the shift in the policy outlook may push the EURUSD back towards 1.3000 as market participants scale back bets for QE3. However, we may see the Fed continue to endorse its 2014 pledge amid the ongoing weakness in housing paired with the protracted recovery in the labor market, and central bank Chairman Ben Bernanke may keep the door open to expand policy further in an effort to balance the risks surrounding the region. In turn, we may see the EURUSD continue to retrace the decline from earlier this month, and the pair may ultimately breakout of its bearish formation as market participants increase bets for more easing.

Potential Price Targets For The Rate Decision

EURUSD_Trading_the_Federal_Open_Market_Committee_Rate_Decision_body_04.png, EURUSD: Trading the Federal Open Market Committee Rate Decision

A look at the encompassing structure sees the EURUSD trading within a broad descending channel formation dating back to the August with the pair holding just below the 50-day moving average at the 1.32-figure. Key daily topside resistance stands at the confluence of channel resistance and former trendline support at 1.3255 with only a breach above short-term channel resistance dating back to the February highs, currently at 1.33, negating our bearish bias. Daily support rests with trendline support dating back to the February lows at 1.3040 backed by the 1.30-handle and the 38.2% Fibonacci extension taken from the October and February crests at 1.2865.

EURUSD_Trading_the_Federal_Open_Market_Committee_Rate_Decision_body_04_1.png, EURUSD: Trading the Federal Open Market Committee Rate Decision

Our 30min scalp chart highlights interim support at the 100% Fibonacci extension taken from the April 8th and 16th troughs at 1.3175 backed by the convergence of channel support and the 78.6% extension at 1.3135. A break below this level offers further conviction on our directional bias with such a scenario eyeing support targets at the 61.8% extension at 1.3105, 1.3085, and the 38.2% extension at 1.3060. Topside resistance stands with the 123.6% extension at 1.3215 backed by the 138.2% extension at 1.3243 and 1.3260. Should the print prompt a bullish dollar response, look to target downside levels with a break below the 1.30-threshold risking substantial losses for the single currency. As the FOMC highlights the biggest event risk for the next 24-hours of trading, we will keep a close eye on the majors for a potential scalp.

How To Trade This Event Risk

Trading the given event risk may not be as clear cut as some of our previous trades as Fed Chairman Bernanke is scheduled to speak at 18:15 GMT, but the developments coming out of the meeting could pave the way for a long U.S. dollar trade should the central bank strike an improved outlook for the economy. Therefore, if the Fed raises its fundamental forecast and sounds a bit more hawkish this time around, we will need a red, five-minute candle following the announcement to establish a sell entry on two-lots of EURUSD. Once these conditions are fulfilled, we will set the initial stop at the nearby swing low or a reasonable distance from the entry, and this risk will generate our first objective. The second target will be based on discretion and we will move the stop on the second lot to breakeven once the first trade hits its mark in order to preserve our profits.

On the other hand, the Fed may strike a balanced tone for the region as the region remains vulnerable to external shocks, and the committee may preserve a cautious outlook for the economy amid the ongoing slack in private sector activity. As a result, if the FOMC preserves its 2014 pledge and sees a risk for a slower recovery, we will implement the same strategy for a long euro-dollar trade as the short position laid out above, just in reverse.

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)

MAR 2012

3/13/2012 18:15 GMT

0.25%

0.25%

-39

-26

March 2012 Federal Open Market Committee Interest Rate Decision

EURUSD_Trading_the_Federal_Open_Market_Committee_Rate_Decision_body_ScreenShot079.png, EURUSD: Trading the Federal Open Market Committee Rate Decision

The Federal Open Market Committee maintained its current policy stance in March amid the ongoing slack within the real economy, but we saw the central bank soften its dovish tone for monetary policy and raise its fundamental assessment for the region as the recovery gradually gathers pace. Indeed, the U.S. dollar bounced higher following the rate decision, with the EURUSD falling back below 1.3100, but the greenback consolidated throughout the North American trade to end the day at 1.3081.

--- Written by David Song, Currency Analyst and Michael Boutros, Currency Strategist

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

To contact Michael email mboutros@dailyfx.comor follow him on Twitter @MBForex.

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

To be added to Michael’s email distribution list, send an email with subject line “Distribution List” to mboutros@dailyfx.com

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24 April 2012 19:40 GMT