The U.S. Federal Reserve is widely expected to hold borrowing costs at the record-low in September and is anticipated to maintain its $1.75T asset purchase program to encourage a sustainable recovery, and long-term expectations for higher interest rates may drive demands for the dollar as market participants speculate the central bank to tighten policy in 2010.
[U][B]Trading the News: FOMC Interest Rate Decision
[/B][/U]
[U][B]What’s Expected[/B][/U]
Time of release: [B]09/23/2009 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 has had over EURUSD for the past 2 meetings[/B][/U]
[U]August 2009 FOMC Interest Rate Decision[/U]
The FOMC held the key interest rate at 0.25% in August and announced it will continue its asset purchases at a slower pace after extending the $300B program to October. The committee decided to “gradually slow” its purchases as the board aims to utilize the full amount by the end of October, and the MPC went onto say that the recent developments “suggests that economic activity is leveling out” as the government takes unprecedented steps to stimulate the ailing economy. In addition, the Fed said borrowing cost will stay “exceptionally low” for an “extended period” of time in order to foster a sustainable recovery however, the board continued to hold a caution tone as consumer spending “remains constrained by ongoing job losses, sluggish income, lower housing wealth and tight credit.” As the board sees “gradual resumption of sustainable growth,’ the MPC is likely to hold a neutral policy stance as economic activity improves.
[U] June 2009 FOMC interest Rate Decision[/U]
The Fed continued to hold borrowing costs at the record-low in June and maintained its $1.75T asset purchase program in order to foster a sustainable recovery. The central bank said that the economic downturn ‘is slowing’ and held an enhanced outlook for future growth as financial conditions improve however, policymakers continued to hold a dovish outlook for inflation and forecasts price growth to ‘remain subdued for some time.’ The Fed reiterated that the key rate will be held at ‘low levels’ for an ‘extended period of time’ as credit conditions remain far from normal, and the central bank may take additional steps to jump-start the ailing economy as market participants see a risk of a slower recovery. Nevertheless, as the FOMC holds an improved outlook for future growth, the MPC may hold a neutral policy stance throughout the year, and expectations for higher borrowing costs could strengthen the dollar over the near-term.
[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:
[B]How To Trade This Event Risk [/B]
The U.S. Federal Reserve is widely expected to hold borrowing costs at the record-low in September and is anticipated to maintain its $1.75T asset purchase program to encourage a sustainable recovery, and long-term expectations for higher interest rates may drive demands for the dollar as market participants speculate the central bank to tighten policy in 2010. A Bloomberg News survey shows all of the 93 economists polled forecast the FOMC to hold the key rate at 0.25%, while Credit Suisse overnight index swaps are up 87bp in September as investors continue to price in a rate hike for the next 12-months, and expectations for an economic recovery later this year is likely to drive the interest rate outlook higher over the coming months as growth prospects improve. The final GDP reading showed economic activity slipped at an annual rate of 1.0% in the second quarter amid expectations for a 1.5% contraction, with personal consumption falling at a slower pace than initially expected, and the extraordinary efforts taken on by the government should continue to support the ailing economy as policy makers see the nation emerging from the worst recession since the post-war period. Fed Chairman Ben Bernanke said that “the recession is very likely over” during a speech earlier this month, but held a caution tone as he expects unemployment to remain elevated as he sees a risk for a slower recovery. In addition, President Barack Obama anticipates the economy “to start growing again” as financial conditions improve, but went onto say that the downturn in employment “could even get a little bit worse” in the coming months as the prospects for a marked recover remains limited. At the same time, the Fed’ Beige Booknoted demands for employment remained weak across the 12 districts, with household spending staying relatively “flat” during July and August, while “credit standards remained tight” in most regions. As a result, the central bank may decide to extend its emergency programs as 94 U.S. banks seek protection under the FDIC this year, and the rise in bank failures are likely to stoke a weakening outlook for lending activity as financial institutions continue to face loan losses. Nevertheless, market participants speculate the Fed to signal an end to its emergency programs as policy makers hold an improved outlook for growth and inflation, and commentary following the rate decision is likely to move the markets as investors weigh the outlook for future policy.
Trading the given event risk may not be as clear cut as some of our previous trades as market participants anticipate the FOMC to maintain its current policy however, hawkish commentary following the policy meeting could set the stage for a short euro-dollar trade. Therefore, if the central bank holds an improved outlook for the economy and signals it will tighten monetary policy over the coming months, we will look for a red, five-minute candle following the decision to generate a sell entry on two-lots of EUR/USD. Once these conditions are met, we will set our initial stop at the nearby swing high, or a reasonable distance taking volatility into account, and this risk will establish our first target, Our second objective will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade reaches its target in order to preserve our profits.
In contrast, tightening credit conditions paired with the rise in bank failures may lead the Fed to extend its stimulatory programs to foster a sustainable recovery, and price action following an expansion in monetary policy is likely to weigh on the exchange rate as investors scale back expectations for higher borrowing costs. As a result, if the FOMC looks to extend the emergency programs into the following year, we will favor a bearish outlook for the greenback, and will follow the same strategy for a long euro-dollar trade as the short position mentioned above, just in reverse.
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[I]To discuss this report contact David Song, Currency Analyst: <[email protected]>[/I]