trading news reports

U.S. Dollar: Fed Rate Decision on Tap - How Will the Greenback React?

Tuesday, 28 October 2008 11:50:44 GMT  |  David Song, Currency Analyst

After surprising the market with a 50bp rate cut on October 8th, the Federal Open Market Committee is expected to ease policy further as fears of a prolonged recession intensify. Despite the extraordinary efforts by the Fed over the past two months, a Bloomberg news poll showed that economists expect the central bank to lower borrowing costs by 50bp to 1.00%.

Trading the News: FOMC Rate Decision

What’s Expected

Time of release:                  10/29/2008 18:15 GMT, 14:15 EST

Primary Pair Impact :          GBPUSD

Expected:                              1.00%

Previous:                               1.50%

Impact the FOMC’s decisions have had on GBPUSD after the last 3 meetings

 

September 2008 FOMC Rate Decision

The minutes of the September 16th rate decision showed that the Federal Open Market Committee voted 10-0 to hold the benchmark interest rate steady at 2.00% for their third straight meeting. The board noted that upside prices pressure have diminished since the previous meeting as oil prices continued to pullback from its record high in July, and held a dovish outlook as they highlighted the downside risks for growth. The central bank stated that the MPC may ease policy in the coming months as mounting turmoil in the financial market continues to pose a threat to the overall economy, and went on to say that the Fed will respond as needed. The commentary suggests that the FOMC will in fact deliver a rate cut before the end of the year as fears of a recession intensify.

 

 

August 2008 FOMC Rate Decision

The Fed continued to hold a neutral policy stance as they held the benchmark interest rate steady at 2.00% for their second consecutive meeting on August 5th. The FOMC minutes showed that the board voted 10-1 to keep the interest rate unchanged, while Dallas Fed President Richard Fisher was the only dissident to vote for a rate hike. The central bank went on to say that ‘the next policy move would likely be a tightening,’ but added that ‘the time and extend of any change in policy stance would depend on evolving economic and financial developments and the implications for the outlook for economic growth and inflation.' Amid the hawkish outlook for inflation, the lack of direction following the uptick after the release left us without a trade.

 

 

June 2008 FOMC Rate Decision

The FOMC left its benchmark interest rate unchanged at its June 25 policy meeting as the upside risk of inflation balanced the declining U.S. economy.  Oil continued its record pace during the month, raising fears that rising gasoline prices could be more detrimental to the economy than the current troubles from the housing slump. However, the markets’ were expecting the central bank to be far more hawkish in their following statements, to the point that they were forecasting a rate hike at their next meeting. However, chairman Bernanke continued to caution that their remain considerable downside risks as the credit crisis fallout continues. The less than bullish comments would spark bearish dollar price action triggering a long GBPUSD trade worth at least 25 points.

 

 

How To Trade This Event Risk

 

After surprising the market with a 50bp rate cut on October 8^th, the Federal Open Market Committee is expected to ease policy further as fears of a prolonged recession intensify. Despite the extraordinary efforts by the Fed over the past two months, a Bloomberg news poll showed that economists expect the central bank to lower borrowing costs by 50bp to 1.00%. Meanwhile, Fed Fund Futures are showing that market participants have already priced in a 66% chance that the MPC will lower the interest rate by 50bp to 1.00%, which has increased from 42.0% from the previous week. In addition, traders see a 34% chance that the central bank will lower the key rate by 75bp to 0.75%, which has jumped from 0% since last week. Indeed, the failure of Washington Mutual paired with the takeover of Wachovia led the Fed to coordinate with key policymakers around the world to take a preemptive approach in supporting economic growth, and lowered borrowing costs to 1.50% after holding the benchmark interest rate at 2.00% for three consecutive meetings. In addition, the central bank noted that the upside risks for inflation have diminished as oil prices continue to pullback from its record high, indicating that the board is ready and willing to ease policy further in order to avoid a protracted downturn in the economy. Increased turmoil in the global financial market paired with easing price pressures have certainly strengthened the argument for a rate reduction, but the U.S. dollar may continue to benefit from its safe haven status despite the dovish outlook help by the Fed.

 

Trading the given event risk may not be as clear cut as some of our other trades, but nonetheless, the current conditions of the market may spur bullish price action for the greenback even if the MPC decides to deliver a 50bp cut. The U.S. dollar may continue to benefit from its safe haven status as the ECB, the BoE, along with the major central banks around the world push inflationary concerns to the backburner. Earlier this week, U.K. Prime Minister Brown reiterated the need to lower borrowing costs on a global level, while ECB President Trichet stated that there is a great chance that the central bank will lower their respective benchmark interest rate in November. As policymakers all over the globe take on a dovish policy stance, the efforts by the FOMC and the Treasury should help to boost growth forecasts, which in turn could spark bullish sentiment for the greenback. Therefore, an improved outlook for growth following the decision would favor a long dollar trade (short GBPUSD), and we will look for a green, five-minute candle following the commentary to generate a short trade on two lots of the pound-dollar. Our initial stop will be placed at the nearby swing high (or reasonable distance), and our first target will equal this risk. Our second objective will be based on discretion and to preserve profit, we will move the stop on the second lot up to break even when the first lot hits its target.

 

Conversely, a bigger than expected rate cut suggests that conditions have worsened dramatically since their last meeting, and a dour outlook for the economy could fuel bearish sentiment for the greenback. As a result, negative commentary following the decision would favor a short dollar trade (long GPDUSD), and we will follow the same setup for the short position as the long trade mentioned above, just in reverse.

 

Resources

• free demo account
• forex courses
• open an account
• real time news
• free webinars