Forex: EUR/USD- Trading the FOMC Interest Rate Decision

RELATED QUOTES

SymbolPriceChange
EURUSD=X1.3816+0.0002

Trading the News: Federal Open Market Committee Meeting

What’s Expected:

Time of release: 01/30/2013 19:15 GMT, 14:15 EST

Primary Pair Impact: EURUSD

Expected: 0.25%

Previous: 0.25%

DailyFX Forecast: 0.25%

Why Is This Event Important:

Although the Federal Open Market Committee (FOMC) is widely expected to maintain its highly accommodative policy stance in January, the policy statement accompanying the rate decision may heighten the bullish sentiment surrounding the U.S. dollar should the central bank scale back its willingness to expand the balance sheet further. As a growing number of central bank officials take note of a more broad-based recovery in the world’s largest economy, the FOMC may strike a more neutral tone this time around, and the Fed may see scope to conclude its easing cycle in 2013 as the fundamental outlook improves.

Recent Economic Developments

The Upside

Release

Expected

Actual

Change in Non-Farm Payrolls (DEC)

152K

155K

Gross Domestic Product (3Q F)

2.8%

3.1%

Personal Consumption (3Q F)

1.4%

1.6%

The Downside

Release

Expected

Actual

Consumer Confidence (JAN)

64.0

58.6

Consumer Price Index (YoY) (DEC)

1.8%

1.7%

Producer Price Index (YoY ) (DEC)

1.4%

1.3%

As the economic recovery gradually gathers pace, the resilience in private consumption paired with the pickup in housing may encouraged the Fed to adopt a more hawkish tone for monetary policy, and we may see the central bank start to discuss a tentative exit strategy later this year as growth prospects pick up. However, subdued price growth along with the recent decline in household confidence may prompt the Fed to maintain a cautious outlook for the region, and the central bank may keep the door open to expand the open-ended asset purchase beyond the $85B monthly limit in order to encourage a stronger recovery.

Potential Price Targets For The Rate Decision

Forex_EURUSD-_Trading_the_FOMC_Interest_Rate_Decision_body_ScreenShot204.png, Forex: EUR/USD- Trading the FOMC Interest Rate Decision

Indeed, the EURUSD made another run at the 50.0% Fibonacci retracement from the 2009 high to the 2010 low around 1.3500 as market participants increased their appetite for risk, but thelack of momentum to clear the key figure may keep the pair within a tight range ahead of the major event risks on tap for Wednesday. Nevertheless, we’re still keeping a close eye on the relative strength index as the bearish divergence continues to take shape, and we may see a sharp reversal in the exchange rate as the long-term bear flag from 2011 remains in play.

How To Trade This Event Risk

Trading the given event risk may not be as clear cut as some of our previous trades as the Fed sticks to its current policy, but the fresh batch of central bank rhetoric may serve as the fundamental catalyst to spark a bullish reaction in the U.S. dollar as market participants weigh the outlook for monetary policy. Therefore, if the FOMC strikes a more hawkish tone for monetary policy, we will need to see a red, five-minute candle following the statement to establish a sell entry on two-lots of EURUSD. Once these conditions are met, we will set the initial stop at the nearby swing high or a reasonable distance from the entry, and this risk will generate our first target. The second objective will be based on discretion, and we will move the stop on the second lot to breakeven once the first trade hits its mark in order to preserve our profits.

On the other hand, the Fed may retain a cautious tone this time around amid the protracted recovery in the labor market, and the central bank may keep the door open to expand policy further in an effort to stem the downside risks facing the world’s largest economy. As a result, if the FOMC shows a greater willingness to carry out its easing cycle throughout 2013, we will carry out the same setup for a long euro-dollar trade as the short position laid out above, just in the opposite direction.

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)

DEC 2012

12/12/2012 17:30 GMT

0.25%

0.25%

+17

+14

December 2012 Federal Open Market Committee Interest Rate Decision

Forex_EURUSD-_Trading_the_FOMC_Interest_Rate_Decision_body_ScreenShot203.png, Forex: EUR/USD- Trading the FOMC Interest Rate Decision

Indeed, the FOMC expanded its open-ended asset purchase program to $85B a month in an effort to encourage a stronger recovery, and adopted a ‘qualitative approach’ for monetary policy as the committee set the unemployment threshold at 6.5% while setting a limit for inflation at 2.5%. The U.S. dollar struggled to hold its ground following the announcement, with the EURUSD trading back above the 1.3075 figure, and the greenback failed to regain its footing as the pair ended the day at 1.3072.

--- Written by David Song, Currency Analyst

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

Follow me on Twitter at @DavidJSong

To be added to David's e-mail distribution list, please follow this link.

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Market Data

  • Currencies
    Currencies
    NamePriceChange% Chg
    1.2523-0.0005-0.04%
    USDSGD=X
    1.7302-0.0004-0.02%
    EURSGD=X
    2.1030-0.0011-0.05%
    GBPSGD=X
    81.7813+0.0486+0.06%
    SGDJPY=X
    6.1916+0.0022+0.04%
    SGDHKD=X
    2.5855+0.001+0.04%
    SGDMYR=X
    9,120.3457-30.873-0.34%
    SGDIDR=X
    4.9716+0.0075+0.15%
    SGDCNY=X
    1.1692+0.0007+0.06%
    AUDSGD=X
  • Commodities
    Commodities
    NamePriceChange% Chg
    1,294.60-8.90-0.68%
    GCM14.CMX
    19.65+0.02+0.08%
    SIK14.CMX
    90.18-0.65-0.72%
    ^XAU
    3.04+0.02+0.51%
    HGK14.CMX
    104.59+0.83+0.80%
    CLK14.NYM
  • Bonds
    Bonds
    TreasuryYield (%)Yield Change
    1.73+0.08
    ^FVX
    2.72+0.08
    ^TNX
    3.52+0.06
    ^TYX

MARKET MOVERS

  • Most Actives
    Most Actives
    NamePriceChange% Chg
    0.115-0.002-1.71%
    B22.SI
    0.48+0.020+4.35%
    5GJ.SI
    2.27+0.090+4.13%
    5ME.SI
    2.190.0000.00%
    JS8.SI
    0.61+0.005+0.83%
    E5H.SI
  • % Gainers
    % Gainers
    NamePriceChange% Chg
    0.162+0.034+26.56%
    5GF.SI
    0.20+0.034+20.48%
    5WD.SI
    0.59+0.050+9.26%
    L5I.SI
    0.28+0.020+7.69%
    C33.SI
    0.215+0.015+7.50%
    5UE.SI
  • % Losers
    % Losers
    NamePriceChange% Chg
    0.103-0.010-8.85%
    5OS.SI
    0.112-0.008-6.67%
    5RC.SI
    0.355-0.025-6.58%
    KJ9.SI
    0.215-0.015-6.52%
    F9M.SI
    0.29-0.020-6.45%
    5PC.SI