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EURUSD: Trading the Federal Open Market Committee Minutes

EURUSD: Trading the Federal Open Market Committee Minutes

David Song, Strategist

Trading the News: Federal Open Market Committee Meeting Minutes

What’s Expected:

Time of release: 07/11/2012 18:00 GMT, 14:00 EDT

Primary Pair Impact: EURUSD

Expected: --

Previous: --

DailyFX Forecast: --

Why Is This Event Important:

The FOMC Minutes highlight the biggest event risk for the next 24-hours of trading and the fresh batch of central bank rhetoric may increase the appeal of the USD should the committee continue to talk down speculation for QE3. As the Fed votes to extend ‘Operation Twist,’ it certainly seems as though the central bank is moving away from quantitative easing, and we may see the FOMC continue to soften its dovish tone for monetary policy as the world’s largest economy gets on a more sustainable path. However, the Fed may leave the door open to ease further amid the ongoing slack in private sector activity, and the central bank may continue to keep all options on the table as the debt crisis clouds the outlook for global growth.

Recent Economic Developments

The Upside

Release

Expected

Actual

Consumer Credit (MAY)

$8.500B

$17.117B

Average Hourly Earnings (YoY) (JUN)

1.7%

2.0%

Consumer Price Index ex Food & Energy (YoY) (MAY)

2.2%

2.3%

The Downside

Release

Expected

Actual

Change in Non-Farm Payrolls (JUN)

100K

80K

Personal Spending (MAY)

0.0%

0.0%

Advance Retail Sales (MAY)

-0.2%

-0.2%

As the rise in wage growth paired with the stickiness in underlying prices raises the threat for inflation, we may see the FOMC continue to curb bets for QE3, and the central bank sound a bit more hawkish this time around as economic activity picks up. However, we may see the committee lean towards more easing amid the slowdown in private sector consumption along with the protracted recovery in the labor market, and the central bank may show a greater willingness to push through another large-scale asset purchase program in an effort to stem the persistent slack in the real economy.

Potential Price Targets For The Rate Decision

EURUSD_Trading_the_Federal_Open_Market_Committee_Minutes_body_ScreenShot033.png, EURUSD: Trading the Federal Open Market Committee Minutes

As the EURUSD carves out a lower high coming into July, we should see the downward trend from 2011 continue to take shape, and the pair looks poised for fresh 2012 lows amid the deviation in the policy outlook. As the European Central Bank appears to be embarking on a zero-interest rate policy, speculation for lower borrowing costs instills a bearish outlook for the euro-dollar, and the weakening outlook for Europe should push the exchange rate lower over the remainder of the year as the debt crisis continues to drag on investor confidence. For a complete EURUSD technical outlook and scalp levels, refer to today’s Winners/Losers report.

How To Trade This Event Risk

Trading the given event risk may not be as clear cut as some of our previous trades, but the slew of central bank rhetoric may prop up the greenback should the central bank highlight an improved outlook for the U.S. economy. Therefore, if the Fed softens its dovish tone and talks down bets for more QE, we will need a red, five-minute candle following the statement to establish a sell entry on two-lots of EURUSD. Once these conditions are met, 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 cost once the first trade hits its mark in an effort to lock-in our profits.

On the other hand, the FOMC may strike a cautious outlook for the region amid the ongoing slack in private sector activity, and the committee may lean towards more QE in order to encourage a stronger recovery. As a result, if the Fed shows an increased willingness to expand the balance sheet further, 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 Meeting Minutes has had on USD during the last release

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

APR 2012

5/16/2012 18:00 GMT

--

--

-6

-13

April 2012 Federal Open Market Committee Meeting Minutes

EURUSD_Trading_the_Federal_Open_Market_Committee_Minutes_body_ScreenShot024.png, EURUSD: Trading the Federal Open Market Committee Minutes

After maintaining its current policy in April, the FOMC raised its fundamental outlook for the world’s largest economy and talked down speculation for another round of quantitative easing as the recovery gradually gathers pace. The less dovish remarks from the Fed propped up the greenback, with the EURUSD slipping below the 1.2700 figure, but we saw the reserve currency consolidate during the North American trade as the pair closed at 1.2715.

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

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