3 Scenarios for Trading the FOMC Interest Rate Decision

By David Song, Currency Analyst

- Federal Open Market Committee (FOMC) to Release Updated Forecast

- Fed Chairman Ben Bernanke to Hold Press Conference at 18:30 GMT

Trading the News: Federal Open Market Committee Meeting

A material shift in the Federal Open Market Committee’s (FOMC) policy may prop up the U.S. dollar as market participants see the central bank scaling back its bond-purchasing program to $40B in September.

What’s Expected:

Time of release: 09/18/2013 18:00 GMT, 14:00 EDT

Primary Pair Impact: EURUSD

Expected: $40B

Previous: $45B

DailyFX Forecast: $30B to $45B

Why Is This Event Important:

Indeed, there are three possible outcomes (taper, no taper & no taper with more detailed exit strategy), all of which will set the near-term outlook for the U.S. dollar , but the more encompassing market reaction may take shape following Chairman Ben Bernanke’s press conference should the central bank head continue to call for an end of quantitative easing in 2014.

Expectations: Bullish Argument/Scenario

Release	Expected	Actual
ISM Non-Manufacturing (AUG)	55.0	58.6
ISM Manufacturing (AUG)	54.0	55.7
Gross Domestic Product (Annualized) (QoQ) (2Q P)	2.2%	2.5%

The updated forecasts (growth, inflation & interest rate) from the Fed may highlight a stronger recovery for the U.S. economy, and any comments showing a greater willingness to implement the exit strategy ahead of schedule may generate a sharp rally in the dollar as market participants see higher interest rates on the horizon.

Risk: Bearish Argument/Scenario

Release	Expected	Actual
Consumer Price Index (YoY) (AUG)	1.6%	1.5%
Change in Non-Farm Payrolls (AUG)	180K	169K
Personal Consumption Expenditure Core (YoY) (JUL)	1.3%	1.2%

Nevertheless, the Fed may show further support for its highly accommodative policy stance amid the threat for deflation, and signs of a delay in the exit strategy may trigger a marked decline in the reserve currency as central bank dove Janet Yellen inches closer to taking the chairmanship.

How To Trade This Event Risk(Video)

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BullishUSD Trade: FOMC Tapers QE and/or Lays More Detailed Exit Strategy

• Need red, five-minute candle following the print to consider a short EURUSD trade
• If market reaction favors a long dollar trade, short EURUSD with two separate position
• Place stop at the near-by swing high/reasonable distance from entry; look for at least 1:1 risk-to-reward
• Move stop to entry on remaining position once initial target is hit, set reasonable limit

Bearish USD Trade: QE Stays at $85B; Fed Supports Current Policy

• Need green, five-minute candle to favor a long EURUSD trade
• Implement same setup as the bullish dollar trade, just in opposite direction

Potential Price Targets For The Rate Decision

EURUSD

Chart - Created Using FXCM Marketscope 2.0

• Breaks Out of Downward Trend; Yet to Fill Sunday Gap Open
• Bearish Divergence in Relative Strength Index Remains Intact
• Interim Resistance: 1.3370 (100% Fib expansion) to 1.3380 Pivot
• Interim Support: 1.3150 (38.2% Fib retracement) to 1.3180 Pivot

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)
JUL 2013	07/31/2013 18:00 GMT	0.25%	0.25%	+45	+12

July 2013 Federal Open Market Committee Interest Rate Decision

The FOMC sounded rather dovish after maintaining its current policy in July as the central bank continued to highlight the threat of subdued inflation, but it seems as though that a growing number of central bank officials are becoming increasingly upbeat towards the economy as the committee sees a stronger recovery ahead. Nevertheless, the dollar struggled to hold its ground following the policy statement, with the EURUSD pushing above the 1.3325 region, but we saw the pair consolidate going into the close as the euro-dollar end the day at 1.3300.

--- Written by David Song, Currency Analyst

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

Follow me on Twitter at @DavidJSong

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