Currency Trading Markets Show Little Concern Ahead of Fed Rate Decision

Currency trading market volatility measures show expectations of subdued price movements through the short term—even as the US Federal Open Market Committee (FOMC) rate decision looms. Price action in 1-week currency options is especially surprising, as our DailyFX 1-Week Volatility Index has now fallen to its lowest levels since 2007. That currency options traders would place such little significance on the historically market-moving US FOMC rate announcement suggests we may see relatively little price moves following the event. Our general trading bias remains towards currency trend and range trade, but we must nonetheless remain mindful of the market-moving potential of tomorrow’s rate announcement.

Preferred Strategies

Our medium term bias remains the same, but we would advise against overleveraging oneself on US dollar pairs in the days ahead; it is extremely difficult to predict what the dollar may or may not do before and after the US FOMC rate decision. That said, our preferred strategies remain unchanged; given the likelihood of Rangebound and directionless currency price action, we prefer trading strategies such as Jamie Saettele’s “Picking Tops and Bottoms” report through the short term.

Discretionary Strategy Outlook

[B]Picking Tops and Bottoms[/B] – This difficult-to-classify strategy has performed well as of late, and we see little reason to remove it from our “Preferred” position on our weekly outlook report. The prospects of Rangebound markets ostensibly increase the likelihood of short-term Tops and Bottoms, and we will trade accordingly.

[B]Speculative Sentiment Index Trading Signals[/B] – Our Speculative Sentiment Index trading signals have begun to improve as of late, as increased strength in currency trends bodes well for the trend-friendly currency trading signals. We expect positive performance out of our SSI trades through the medium term.

[B]Pairs to Range Trade[/B] – Rangebound markets should improve the profitability of our “Pairs to Range Trade”, but the strategy’s recent underperformance decreases confidence in its ability to outperform in seemingly favorable market conditions. Keep an eye out for good range setups, but as always use your own discretion in picking promising trades.

Systems Outlook

[B]Dynamic Carry Trade Basket[/B] – Please see our weekly report on Carry Trades for a better idea on what to expect through short-term trade: Carry Trade Range May not Last Through Fed’s Rate Decision

[B]Technical Analyzer and Signals from Thomson IFR[/B] – Use own discretion to filter through IFR or Technical Analyzer signals in the week ahead.

Chart Definitions

[B]Volatility Percentile[/B] – The higher the number, the more likely we are to see strong movements in price. This number tells us where current implied volatility levels stand in relation to the past three months of trading. We have found that implied volatilities tend to remain very high or very low for extended periods of time. As such, it is helpful to know where the current implied volatility level stands in relation to its medium-term range.

[B]Trend[/B] – This indicator measures trend intensity by telling us where price stands in relation to its three-month range. A very low number tells us that price is currently at or near quarterly lows, while a higher number tells us that we are near the highs. A value at or near 50 percent tells us that we are at the middle of the currency pair’s quarterly range.