Trading the News:Federal Open Market Committee Interest Rate Decision

What’s Expected:

Time of release:11/02/201116:30 GMT,12:30 EST

Primary Pair Impact:EURUSD

Expected:0.25%

Previous:0.25%

DailyFX Forecast:0.25%

Why Is This Event Important:

The Federal Open Market Committee is widely expected to maintain its current policy in October, but comments accompanying the rate decision is likely to heavily influence the U.S. dollar as market participants weigh the outlook for monetary policy. In light of the recent developments coming out of the world’s largest economy, we may see the FOMC strike an improved outlook for future growth, and the central bank may preserve a wait-and-see approach throughout the remainder of the year as Fed officials expect economic activity to gather pace over the coming months.

However, as the ongoing weakness within the real economy dampens the outlook for inflation, central bank Chairman Ben Bernanke may show an increased willingness to expand monetary policy further, and the committee may keep the door open to conduct another round of quantitative easing in order to keep the economy from slipping back into a recession. Trading the given event risk may not be as clear cut as some of our previous trades as Mr. Bernanke is scheduled to hold the quarterly press conference at 14:15 GMT, and we may see the USD consolidate ahead of the discussion as investors mull over the prospects for the world’s largest economy.

Recent Economic Developments

The Upside

Release	Expected	Actual
Personal Consumption (3Q A)	1.9%	2.4%
Capital Goods Orders Non-Defense ex Aircrafts (SEP)	0.5%	2.4%
Advance Retail Sales (SEP)	0.7%	1.1%

The Downside

Release	Expected	Actual
Personal Income (SEP)	0.3%	0.1%
Consumer Confidence (OCT)	46.0	39.8
Consumer Price Index ex Food & Energy (YoY) (SEP)	2.1%	2.0%

The expansion in private sector consumption paired with the rise in business investments may encourage the FOMC to hold an improved outlook for the region, and we may see the EUR/USD continue to give back the advance from the previous month should the central bank talk down speculation for QE3. However, the drop in household confidence paired with the slowdown in wage growth could dampen the prospects for a sustainable recovery, and the Fed may take additional steps to stimulate the ailing economy in an effort to stem the risk of a double-dip recession. In turn, we may see the rebound from 1.3607 gather pace over the next 24-hours of trading, and the euro-dollar may retrace the sharp decline from earlier this week as market participants raise bets for further easing.

Potential Price Targets For The Release

How To Trade This Event Risk

As we expect the FOMC to maintain its current policy, we will have to base our bias on the policy statement, and the market reaction could set the stage for a long U.S. dollar trade should the central bank cast an improved outlook for the world’s largest economy. Therefore, if the committee talks down speculation for additional monetary support, we will need to see a red, five-minute candle following the rate decision to establish a sell entry on two-lots of EUR/USD. Once these conditions are fulfilled, we will set the initial stop at the nearby swing low or a reasonable distance from the entry, and this risk will establish our first objective. The second target will be based on discretion, and we will move the stop on the second lot to cost once the first trade reaches its mark in an effort to lock-in our winnings.

On the other hand, easing price pressures paired with the ongoing weakness within the labor market may lead the Fed to hold a cautious outlook for the region, and the central bank may show an increased willingness to expand policy further as it aims to encourage a sustainable recovery. As a result, if Chairman Bernanke talks up speculation for QE3, we will implement the same setup for a long euro-dollar trade as the short position mentioned above, just in reverse.

Impact that the FOMC Interest Rate decision has had on USD during the last meeting

Period	Data Released	Estimate	Actual	Pips Change (1 Hour post event )	Pips Change (End of Day post event)
SEP 2011	09/21/2011 18:15 GMT	0.25%	0.25%	-92	-203

September 2011 Federal Open Market Committee Interest Rate Decision

As expected, the Federal Reserve kept the benchmark interest rate at 0.25% in September, but announced it will implement ‘Operation Twist,’ where the central bank will buy $400B in bonds with maturities between 6 to 30 years while selling an equal amount of debt expiring in three years or less. The FOMC expects the new initiative to ‘put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative,’ and we may see the central bank carry its easing cycle into the following year in an effort to encourage a sustainable recovery. As the committee sees ‘significant downside risks to the economic outlook,’ the central bank may keep the door open to conduct another round of quantitative easing, and Fed Chairman Ben Bernanke may continue to talk up speculation for additional monetary support in an effort to stem the risk of a double-dip recession. The greenback advanced following the announcement, with the EUR/USD slipping back below 1.3700, and the reserve currency continued to gain ground throughout the North American trade as the exchange rate settled at 1.3570 at the end of the day.

--- Written by David Song, Currency Analyst

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