Forex News Trading event of the week or arguably even the whole year – FOMC Rate Decision, Statement, Economic Projections & Press Conference is taking place tonight at 7:00pm BST. Watch my weekly Forex news event’s overview here or read my detailed analysis below and learn how to interpret these particularly important data points.
Expected Market Reaction:
This event will likely see volatility and widening of spreads in the seconds before release. We advise against holding USD positions unless they are already at breakeven. The longer term outlook for the dollar remains bullish, however there is the chance of a short squeeze should the market lose confidence in the Fed making a move this year. If the Fed raise rates, which is unlikely, then we will see sudden strength in the dollar – how long this move lasts will be a function of the accompanying data; the statement, economic projections and press conference. If the Fed keep rates on hold, which is likely, then we may see a small immediate dip in the dollar, but again, the next leg will be a function of the accompanying communications. If the Fed strike a hawkish tone in their statement then the market will be satisfied to hold dollars into the next meeting. If however, forecasts are downgraded and the Fed remains on hold with no new hints at imminent tightening then we may see the dollar sell-off temporarily.
The FOMC meet to decide the Federal Funds Rate, which is the interest rate at which depository institutions lend balances held at the Federal Reserve to other depository institutions overnight. They announce their decision alongside a statement. The FOMC Statement is the primary tool the FOMC uses to communicate with investors about monetary policy. It contains the outcome of their vote on interest rates and other policy measures, along with commentary about the economic conditions that influenced their votes. Most importantly, it discusses the economic outlook and offers clues on the outcome of future votes. The FOMC usually changes the statement slightly at each release; it’s these changes that traders focus on. Four times per year the FOMC also publish a report for Economic Projections. This report includes projections for inflation and economic growth over the next 2 years and, more importantly, a breakdown of individual FOMC member’s interest rate forecasts. On the occasions where the Statement is accompanied by Economic Projections, the FOMC also holds a press conference. The press conference is about an hour long and has 2 parts; first, a prepared statement is read, then the conference is open to press questions. The questions often lead to unscripted answers that create heavy market volatility.
This is arguably the most anticipated Forex news trading event of the year. The market has been eagerly monitoring data and communications from the Fed to assess when they we will raise interest rates for the first time since 2006. This meeting is the first of which where there exists a real possibility of the Fed raising rates by 25 basis points. The Fed funds futures shows an implied probability of the Fed moving at this meeting of less than 30%. However many investment banks are labelling it a very close call, with BoAML holding their base case that the Fed will move. Given the recent inflation readings however, this appears unlikely. The Fed are bound by their mandate which targets inflation at 2%. To measure inflation they look at CPI and PCE, with the latter being their preferred measure. In times of oil price volatility they focus on core measures of these readings to attain a more accurate assessment of underlying price trends. Despite the employment situation being excellent – the other half of their mandate – core PCE for July showed inflation at only 1.2% for the year, which is the slowest rate of annual price increases since March 2011. Yesterday core CPI y/y remained flat at 1.8% while headline CPI showed prices decreased 0.1% during the month of August. The Fed have stated they need to be reasonably confident that inflation is heading back towards the 2% target before raising rates. The recent inflation data shows that inflation is not moving up, if anything it’s moving down. From this it, appears highly unlikely that the Fed will raise rates at this meeting, however it is not impossible.
The Fed’s economic projections will also garner attentions after the rate decision has occurred. The market will be assessing the Fed’s outlook for growth and inflation.
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