EUR/USD: Trading the Federal Open Market Committee Interest Rate Decision
Trading the News: FOMC Interest Rate Decision
Why Is This Event Important:
The April Federal Open Market Committee interest rate decision will be closely watched by market participants as they speculate the central bank to normalize policy further going into the second-half of the year, and a shift in monetary governance would certainly have implications for the U.S. economy as the Fed maintains its dual mandate to ensure price stability while fostering full-employment. However, as policy makers continue to see ongoing weakness in the real economy, the governing board may hold a cautious tone this month as it aims to encourage a sustainable recovery.
Time of release: 04/28/2010 18:15 GMT, 14:15 EST
Primary Pair Impact : EURUSD
Will This Be Market Moving (Scenarios):
The FOMC is widely expected to hold the benchmark interest rate at 0.25% this month as the government aims to support the economy, but market participants see scope for the central bank to begin unloading assets from its balance sheet as financial conditions improve. As a result, comments following the rate decision are expected to move the currency market, and an alteration in the Fed’s economic assessment could set the tone for the U.S. dollar over the near-term as investors weigh the prospects for future policy.
The Fed may drop its highly dovish tone and further unwind its emergency measures over the coming months as the recovery gathers pace, and an upward revision in the central bank’s economic assessment may lead investors to raise expectations for a rate hike in the second-half of the year as policy makers hold an improved outlook for growth and inflation. As a result, if the central bank announces plans to tighten its balance sheet and sees scope for higher borrowing costs later this year, a rise in interest rate expectations could spark a bullish reaction in the U.S. dollar as the MPC continues to normalize monetary policy.
However, the FOMC may opt to keep the interest rate near zero for an “extended period” of time as households continue to face the deterioration in the labor market paired with tightening credit conditions, and the central bank could hold borrowing costs at the record-low throughout the second-half of the year as Fed Chairman Bernanke continues to see “significant restraints on the pace of recovery.” Moreover, central bank head argued that it will take a “significant time” to restore the jobs lost during the economic downturn, and the MPC may keep its inflation-targeting agenda on the backburner as policy makers continue to see “subdued” price growth.
How To Trade This Event Risk
Trading the FOMC interest rate decision may not be as clear-cut as some of our previous trades but nevertheless, price action following the policy meeting could set the stage for a long dollar trade as market participants anticipate the central bank to normalize policy further over the coming months. Therefore, if the board announces plans to sell assets and softens its dovish rhetoric, we will need to see red, five-minute candle following the comments to generate a sell entry on two-lots of EUR/USD. If these conditions are met, we will set the initial stop at the nearby swing high or a reasonable distance after taking market volatility into account, 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 lock-in our profits.
On the other hand, the ongoing weakness in the labor market paired with tightening credit standards may lead the Fed to hold a loose policy stance over the coming months, and dovish rhetoric following the meeting could weigh on the exchange rate as investors scale back expectations for a rate hike later this year. As a result, if the central bank maintains its pledge to hold borrowing costs at the record-low for an “extended period” of time and retains a cautious outlook for the economy, we will favor a bearish outlook for the greenback, and will carry out the same setup for a long euro-dollar trade as the short position mentioned above, just in the opposite direction.
Impact that the FOMC interest rate decision report had on EURUSD during the past month
March 2010 FOMC Rate Decision
|The Federal Open Market Committee kept borrowing costs at 0.25% in March and pledged to keep the benchmark interest rate at the record-low for an “extended period” as the central bank aims to balance the risks for growth and inflation. At the same time, members of the MPC noted investment in nonresidential structures is declining, while housing starts have been flat at a depressed level, and held a dovish outlook for inflation as the ongoing weakness in the private sector limits the prospects for higher price growth. As the central bank expects price pressures to remain “subdued for some time,” market participants anticipate the central bank to maintain a loose policy stance at next month’s meeting, but are pricing in a 91.0 basis point rate hike over the next 12 months, according to the Credit Suisse overnight index swaps.|
What To Look For Before The Release
Traders with access to market depth information via the FXCM Active Trader Platform may use it to gauge the potency of the economic data release as well as to shed some light on the market’s directional bias. Increasing volume ahead of the announcement will telegraph likely follow-through behind whatever move is to materialize, while an imbalance in available liquidity on the Bid versus the Offer side of the market will tell us the direction major institutions are likely favoring ahead of the announcement:
If we see substantially deeper available liquidity on the Bid side of the market, this tells us that major price providers in the market are looking to buy the Euro against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bullish bias on EURUSD ahead of the data release.
If we see substantially deeper available liquidity on the Offer side of the market, this tells us that major price providers in the market are looking to sell the Euro against the US Dollar. Considering that close to 60% of all FX market volume is cleared through just six top banks, we see it prudent to be on the same side of the trade as major institutions and will favor a bearish bias on EURUSD ahead of the data release.
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To discuss this report contact David Song, Currency Analyst: email@example.com
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