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Trading the Federal Open Market Committee (FOMC) Minutes

Trading the Federal Open Market Committee (FOMC) Minutes

2013-07-10 14:00:00
David Song, Strategist
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Trading the News: Federal Open Market Committee Minutes

What’s Expected:

Time of release: 07/10/2013 18:00 GMT, 14:00 EDT

Primary Pair Impact: EURUSD

Expected: --

Previous: --

DailyFX Forecast: --

Why Is This Event Important:

The Federal Open Market Committee (FOMC) Minutes may heighten the appeal of the U.S. dollar amid the growing discussion at the central bank to taper the quantitative easing program. Indeed, the Fed may lay out a more detailed exit strategy as the committee anticipates a stronger recovery in the second-half of the year, and the central bank may halt its easing cycle ahead of 2014 as the outlook for growth and inflation improves.

Recent Economic Developments

The Upside

Release

Expected

Actual

Consumer Credit (MAY)

$12.500B

$19.615B

Change in Non-Farm Payrolls (JUN)

165K

195K

Advance Retail Sales (MAY)

0.4%

0.6%

The Downside

Release

Expected

Actual

ISM Non-Manufacturing (JUN)

54.0

52.2

Gross Domestic Product (Annualized) (QoQ) (1Q F)

2.4%

1.8%

Industrial Production (MAY)

0.2%

0.0%

The persistent strength in private sector consumption paired with the ongoing improvement in employment may encourage a growing number of Fed officials to adopt a more hawkish tone for monetary policy, and the bullish sentiment surrounding the reserve currency should gather pace over the near to medium-term amid the shift in the policy outlook. However, the committee may retain a cautious tone amid the persistent slack in the real economy, and the fresh batch of central bank rhetoric may drag on the greenback should the Fed show a greater willingness to retain its highly accommodative policy stance throughout 2013.

Potential Price Targets For The FOMC Minutes

Forex_Trading_the_Federal_Open_Market_Committee_FOMC_Minutes_body_ScreenShot133.png, Trading the Federal Open Market Committee (FOMC) Minutes

Although we’re seeing the EURUSD hold above the April low (1.2743), a more upbeat FOMC Minutes may spur a more meaningful run at the 23.6% Fibonacci retracement from the 2009 high to the 2010 low around 1.2640-50, but we will need to keep a close eye on the relative strength index as it comes up against oversold territory. In turn, a more dovish statement may serve as a fundamental catalyst to spur a more meaningful correction in the exchange rate as market participants weigh the outlook for monetary policy.

How To Trade This Event Risk

Trading the given event risk may not be as clear cut as some of our previous trades as the FOMC sticks to the sidelines, but a further shift in central bank rhetoric may spark a bullish reaction in the U.S. dollar as Fed appears to be slowly moving away from its easing program. Therefore, if the committee sounds more upbeat on the economy and drops its dovish tone for monetary policy, we will need to see a red, five-minute candle following the statement to generate a sell entry on two-lots of EURUSD. Once these conditions are met, we will set the initial stop at the nearby swing high or a reasonable distance from the entry, 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 hits its mark in an effort to lock-in our gains.

On the other hand, the Fed may preserve a cautious outlook for the region amid the ongoing slack in the real economy, and the central bank may strike a more neutral tone for monetary policy in an effort to promote a stronger recovery. As a result, if the FOMC shows a greater willingness to retain its highly accommodative policy stance, we will implement the same strategy for a long euro-dollar trade as the short position laid out above, just in the opposite direction.

Impact that the FOMC Interest Rate Decision 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)

MAY 2013

05/22/2013 18:00 GMT

--

--

-17

+1

May 2013 Federal Open Market Committee Minutes

Forex_Trading_the_Federal_Open_Market_Committee_FOMC_Minutes_body_ScreenShot064.png, Trading the Federal Open Market Committee (FOMC) Minutes

Although the FOMC retained its current policy in May, the committee argued that more progress ‘would be required before slowing the pace of purchases would become appropriate,’ but we may see the central bank lay out a more detailed exit strategy in the coming months as the economic recovery gradually gathers pace. Despite the initial decline in the EURUSD, the dollar struggled to hold its ground into the close as the pair ended the day at 1.2856.

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com.

Follow me on Twitter at @DavidJSong

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