Trading Tips for Facing FOMC Meeting
In trading forex, the best way to anticipate a Federal Open Market Committee (FOMC) meeting that will result in a Federal Reserve (Fed) interest rate decision in the midst of uncertainty is: wait. There is no doubt that the announcement of interest rates this time has the potential to trigger market volatility. Especially after that Janet Yellen, the Fed Chair, will provide an official statement that will be used as a guide by market participants and will affect the USD.
Almost all business sectors in the United States (US), especially housing, make the scenario to be carried out by the FOMC. Based on the latest survey by Bloomberg, 50% of economists believe that the Fed will raise interest rates and 50% expect that there will be no change. Even so, there is a possibility of a surprise increase of 25 basis points. Maybe, even though no one dared to make sure of that.
Unfortunately, trading based on the Fed’s interest rate decision is not simple. At this FOMC meeting, the Fed will also release economic projections along with the interest rate decision and will be followed by a press conference by Janet Yellen.
We might see the market reaction immediately after the announcement, followed by a slight correction and then a price consolidation before Yellen holds a press conference. When the press conference ends, the USD is likely to start moving in a certain direction, and that is the real market reaction.
There are at least three things that must be considered in the announcement:
- Interest rate
- Instructions from the Fed’s official statement
- Economic projections
And this is a possible scenario and the effect on the USD:
- Interest rates are rising but there are implications that this increase is the last in this year.Possible effects: USD will initially strengthen then corrected
- There is no increase in interest rates but there are indications that the interest rate increase will be carried out the following year.Possible effects: initially the USD will weaken but it will likely be followed by a considerable strengthening.
- There is no increase in interest rates and there is no indication when the interest rate increase will be implemented.Possible effects: weakening of the USD in the next few days.
- There is an increase in interest rates and there are indications that next year there will be another interest rate increase, if the US economy continues to strengthen.Possible effects: rally in the strengthening of the USD, and may occur for several days.
One of the things that causes the interest rate decision this time is so complicated is that there has been an improvement and a weakening of the US economy since the FOMC meeting in July. Job and manufacturing growth slowed, retail sales rose in part and consumer confidence levels varied. Nonetheless, income levels rose, the unemployment rate fell and the housing sector was gaining positive momentum.
Be prepared to face the FOMC decision. Use your capital wisely and limit your risk.