The FOMC is expected to keep their benchmark rate unchanged for another month as there remains downside risk to the economy. We have started to see a pull back in equity markets as expectations for a recovery have started to dim. Concerns are that despite the current downturn showing signs of abating, growth may be difficult to return which is fueling speculation that Chairman Bernanke may be dovish in his post decision comments.
[U][B]Trading the News: FOMC Interest Rate Decision[/B][/U]
[U]
[B]What’s Expected[/B][/U]
Time of release: [B] 06/24/2009 18:15 GMT, 14:15 EST[/B]
Primary Pair Impact : [B]EURUSD[/B]
Expected: 0.25%
Previous: 0.25%
[U][B]Effect the FOMC rate decision had over EURUSD for the past 2 months[/B][/U]
[B]Period[/B]
[B]Data Released[/B]
[B]Estimate[/B]
[B]Actual[/B]
[B]Pips Change[/B]
[B](1 Hour post event )[/B]
[B]Pips Change[/B]
[B](End of Day post event)[/B]
April 2009
04/29/2008 19:15 GMT
0.13%
[B]0.25%[/B]
-54
-64
March 2009
03/18/2008 19:15 GMT
0.25%
[B]0.25%[/B]
+382
+379
[U]April 2009 FOMC Rate Decision
[/U]
The FOMC held their benchmark rate at 0.25% which was expected despite the median forecast of 0.13% . Essentially rate are 0-25% but he lower forecast showed that there was an expectation that we could see a dovish central bank. Indeed, the committee said that “conditions are likely to warrant exceptionally low levels...for an extended period.” Furthermore, the FOMC reiterated measures first announced in March, when they said they would still purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year, as well as $300 billion of Treasury securities by autumn. The subdued statement led to a temporary break from prevailing risk appetite and sunk the EURUSD over 100 pips before it regained its footing which was enough to generate a profitable short trade of 50 pips.
[U]March 2009 FOMC Rate Decision[/U]
The Federal Reserve left the Fed Funds rate at 0%-.25% but announced that they would initiate quantitative easing efforts. The central bank outlined their plan to buy up to $300 billion worth of longer-term Treasury securities over the next six months in order to help improve conditions in private credit markets, and would also buy up to an additional $750 billion of agency mortgage-backed securities and increase purchases of agency debt by up to $100 billion. Risk appetite soared in the announcement as expectations grew that the measures would finally thaw credit markets and lead to a recovery of the world’s largest economy. The clear bullish reaction would have warranted a long position and led to at least 75 pips in profit as the pair rose over 350 pips on the day.
[B]What To Look For Before The Release[/B]
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:
[U][B]
Bullish Scenario:[/B][/U]
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.
[U][B]Bearish Scenario:[/B][/U]
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.
[B]
How To Trade This Event Risk [/B]
The FOMC is expected to keep their benchmark rate unchanged for another month as there remains downside risk to the economy. We have started to see a pull back in equity markets as expectations for a recovery have started to dim. Concerns are that despite the current downturn showing signs of abating, growth may be difficult to return which is fueling speculation that Chairman Bernanke may be dovish in his post decision comments. The World Bank downgraded its growth forecast for the global economy to -2.9% from -1.7% and without a global recovery the upside potential for the U.S. may be limited. Yet, manufacturing continues to regain its footing with the Richmond Fed reading improving to 6 from 4 which is a sharp rise from the record low -55 in December and existing home sales rose to its highest level since October as the housing market continues to show signs of stabilizing. Therefore, we could see the statements take a more optimistic tone especially with the rate of job losses slowing in the country to -345K from -504K. Traders will focus to see whether the central bank will alter their quantitative easing efforts based on their outlook. Additionally, concerns that inflation risks will rise as the economy recovers and the Fed continues to print money has policy makers already talking about an exit strategy. Therefore, a bullish Chairman Bernanke could raise interest rate expectations and spark dollar strength.
Trading the given event risk may not be as clear cut as some of our other trades as investors expect the Fed to hold rates steady. However, commentary following the rate decision is likely to spark volatility in the U.S. dollar as market participants weigh the effectiveness of the new policy. Therefore, if the FOMC expand its rate of purchases, we could see a rise in risk aversion as it may be taken as a sign that more downside risk remain, and will look for a red, five-minute candle following the release to generate a sell entry on two lots of EURUSD. Once these conditions are met, we will place our initial stop at the nearby swing high (or reasonable distance taking volatility into account), and this risk will determine our first target. Our second target will be based on discretion, and in an effort to preserve our profits, we will move the stop on the second lot to breakeven once the first trade reaches its target.
Conversely, zero new efforts and a bullish Chairman Bernanke could spark risk appetite which would lead us to short the greenback, and we will follow the same strategy for a long euro-dollar trade as the short position mentioned above, just in reverse.
