Australia , the USA and GB will all announce rate hikes this week, how fast, how big , will all influence the relevant currencies and other correlative assets.
Traders should be prepared and able to maximize on the movements of the upcoming meetings, whatever the outcome.
The Fed decision will be instrumental to the dollar, and in turn the pound, Bloomberg’s John Stepek notes.
The Fed is expected to raise rates by three-quarters of a percentage point this week, but that’s not the issue. The key is the tone of the press conference.
If the market takes it to be “dovish” (ie suggesting that rates will peak earlier), you’d expect the chart to continue lower. If the market takes it to be “hawkish” (ie there will be no mercy in the fight against inflation), then you’d expect the chart to move higher.
Therefore the Federal Open Market Committee (FOMC) meeting is the big one, the meeting is an important event for all traders to prepare for.
As one of the key gauges of the future of the US economy, the biggest economy in the world, the meeting generates a considerable amount of market movement both before and after it takes place. Technical, fundamentals and sentiment all come into play, so be prepared to take action with the volatility.
So – how can you make the most out of this economic event as a part of your trading strategy? The first step is to be fully informed about what exactly is at stake in the FOMC meeting, and what kind of opportunities arise from the talks.
What happens in the meeting?
Every FOMC meeting sees seven governors of the board and five Federal Reserve Bank presidents discuss and decide on monetary policy for the US. The meeting ultimately has two main purposes: to review existing economic data and, in light of this, to decide what kind of intervention is necessary.
The committee’s decision considers huge quantities of data including household spending, business fixed investment, inflation and employment growth. While the meeting is entirely private, the key decisions are announced at a press conference shortly after the meeting has finished.
Three weeks after the FOMC has passed, the minutes are published in full. The FOMC ultimately seeks to stabilise the economy by raising or lowering interest rates.
Using a wealth of economic data allows the committee members to evaluate whether they want to drive or slow inflation in relation to money supply and the target inflation rate of 2 percent.
Why is the meeting important for traders?
The FOMC, alongside the Non-Farm Payrolls report, is a key indicator of the US economy’s health. Traders might use the committee’s decision to provide a broad context for their trading strategies. The FOMC’s decision has a direct impact on these specific trading instruments in particular:
Dollar: If the FOMC decides to increase interest rates, demand may increase and the value of the dollar is likely to rise.
Gold: If the dollar is strengthened by higher interest rates, this may cause gold’s value to decline. Traders could flock to gold if the FOMC’s outcome suggests a negative outlook for the US economy, because it is seen as a stable asset that holds its value throughout periods of turbulence.
Indices: Share prices may be pushed down in the case of rising interest rates, meaning that US indices are subject to movements from speculation.
Bonds: Rising interest rates may cause bonds to fall overall.
Since the US economy is the largest economy in the world, the repercussions from the FOMC’s decision can be felt worldwide.
Traders across the globe pay attention to the decision as an indicator of global economic trends, and an insight into how other central banks around the world might adjust their inflation policy.
How might traders adjust their strategy?
The volatility which surrounds the FOMC’s decision can be a source of potential trading opportunities. Day traders in particular might adapt their strategy to maximise on the shifts which occur both before and after the meeting.
Speculation weeks before the announcement is common, meaning that the markets may be prepared for either outcome. Those who prefer to follow long-term trading patterns should bear in mind that the FOMC’s decision may take a considerable amount of time to fully impact the economy.
By formulating a trading strategy which accounts for each meeting, traders might be able to maximise on the movements, whatever the outcome.
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