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EUR/USD: Trading the Federal Open Market Committee Interest Rate Decision

EUR/USD: Trading the Federal Open Market Committee Interest Rate Decision

2011-03-14 20:38:00
David Song, Currency Strategist
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Trading the News: Federal Open Market Committee Interest Rate Decision

What’s Expected:

Time of release: 03/15/201118:15 GMT, 14:15 EST

Primary Pair Impact: EURUSD

Expected: 0.25%

Previous: 0.25%

DailyFX Forecast: 0.25%

Why Is This Event Important:

The Federal Open Market Committee is widely expected to maintain its current policy in March, but the statement accompanying the rate decision is likely to move the currency market as investors weigh the prospects for future policy. As the FOMC keeps the benchmark interest rate at the record low and carries out the additional $600B in quantitative easing, the committee is likely to retain its pledge to keep borrowing costs close to zero for an “extended period” of time, and the central bank may continue to hold a dovish tone for future policy as growth and inflation remain subdued. However, the Fed may strike an improved outlook for the region as private sector activity gathers pace, and the central bank may show an increased willingness to gradually normalize monetary policy in 2011 as the risk for a double-dip recession subside.

Recent Economic Developments

The Upside

Release

Expected

Actual

Consumer Credit (JAN)

$3.500B

$5.014B

ISM Manufacturing (FEB)

61.0

61.4

Consumer Confidence (FEB)

65.5

70.4

The Downside

Release

Expected

Actual

Non-Farm Payrolls (FEB)

196K

192K

Personal Spending (JAN)

0.4%

0.2%

GDP (4Q P)

3.3%

2.8%

The faster pace of expansion in consumer credit paired with the ongoing improvement in household sentiment certainly encourages an improved outlook for the U.S. and the FOMC may raise its fundamental assessment for the world’s largest economy as private sector consumption remains one of the leading drivers of growth. However, the Fed may retain a cautious attitude towards the real economy given the protracted recovery in the labor market, and the central bank may see scope to ease monetary policy further over the coming months in order to stem the downside risks for growth and inflation. In turn, dovish comments from the FOMC is likely to weigh on the exchange rate, and speculation for another round of QE could instill a bearish outlook for the reserve currency as interest rate expectations deteriorate.

Potential Price Targets For The Release

EURUSD_Trading_the_Federal_Open_Market_Committee_Interest_Rate_Decision_body_ScreenShot011.png, EUR/USD: Trading the Federal Open Market Committee Interest Rate Decision

How To Trade This Event Risk

Trading the FOMC rate decision is certainly not as clear cut as some of our previous trades, but the comments following the policy meeting could set the stage for a long U.S. dollar trade as the central bank sees the recovery gradually gathering pace. Therefore, if the Fed raises its economic outlook and talks down speculation for another round of QE, we will need a red, five-minute candle subsequent to the policy statement in order to establish a sell entry on two-lots of EUR/USD. Once 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 generate 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 protect our profits.

On the other hand, the Fed may continue to emphasizes the downside risks for the economy as households cope with tight credit paired with the protracted recovery in labor market, and the central bank may show an increased willingness to ease monetary policy further this year as it maintains its dual mandate to ensure price stability while fostering full-employment. As a result, if the FOMC strikes a highly dovish tone for future policy, we will carry out the same setup for a long euro-dollar trade as the short position mentioned 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)

Jan 2011

01/26/2011 19:15 GMT

0.25%

0.25%

+34

+30

January 2011 Federal Open Market Committee Interest Rate Decision

The Federal Open Market Committee kept the benchmark interest rate at the record-low in January, and pledged to carry out the additional $600B in quantitative easing in order to encourage a sustainable recovery. The Fed reiterated that the current rate of economic expansion remains “insignificant to bring about a significant improvement in labor conditions,” and went onto say that private sector consumption remains constrained by “ high unemployment, modest income growth, lower housing wealth, and tight credit.” In turn, the central repeated that the key rate will stay “exceptionally low” for an “extended period,” and central bank may see scope to expand monetary policy further over the coming months in order to combat the protracted recovery in the labor market. Indeed, the U.S. dollar lost ground following the dovish comments from the Fed, with the EUR/USD pushing back above 1.3700, but the bearish reaction in the greenback was short-lived as the exchange rate ended the trading session at 1.3689.

EURUSD_Trading_the_Federal_Open_Market_Committee_Interest_Rate_Decision_body_ScreenShot010.png, EUR/USD: Trading the Federal Open Market Committee Interest Rate Decision

Questions? Comments? Join us in the DailyFX Forum

Join Quantitative Strategist David Rodriguez in the DailyFX Trading Room to cover the event LIVE!

View the Expo Presentation on ‘Trading the News’ For Additional Resources

To discuss this report contact David Song, Currency Analyst: dsong@dailyfx.com

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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