Today we are awaiting for FOMC Rate Decision, Statement, Economic Projections & Press Conference (7:00pm GTM). These releases will likely see volatility and widening of spreads in the seconds before release. We advise against holding USD positions unless they are already at break-even. Even if the position is at break- even, also consider other factors such as potential slippage, and your brokers practices during extremely volatile events.
Description:
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.
Summary:
FOMC Rate Decision is arguably the most anticipated
single 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 there is a high probability of the Fed raising rates by 25
basis points. The Fed funds futures puts the implied probability of the
Fed moving at this meeting at over 80%. Many analysts are predicting a
more “dovish” or cautious hike, where the Fed raises rates then stresses
the case for a more gradual normalization process moving forward. On
the other hand, some analysts such as Goldman Sachs have suggested that
the Fed won’t want “formalize this term,” having been backed into a
corner with past guidance phrases like “considerable time”, and that
Yellen will likely suggest future changes aren’t on a preset course and
depend on how the economy and markets react.
Expected Market Reaction:
It is important to understand that FOMC Rate Decision is unprecedented
considering it has been nearly a decade since the Fed has raised rates,
making it very difficult to know just how much of the move has been
priced in and exactly how the market will react. If the Fed raises
rates as expected we will likely see immediate strength in the USD, then
the market will likely turn to the statement, projections, and
following press conference for continued direction.
