EURUSD: Trading The Federal Open Market Committee Rate Decision

By Michael Boutros, Currency StrategistDavid Song, Currency Analyst

Trading the News: Federal Open Market Committee Interest Rate Decision

What’s Expected:

Time of release: 04/25/2012 16:30 GMT,1 2 :30 EDT

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 is widely anticipated to preserve its current policy stance in April, the fresh batch of central bank rhetoric paired with the updated forecasts for growth and inflation may prop up the U.S. dollar should the central bank highlight an improved outlook for the world’s largest economy. As the Fed takes note of the more robust recovery, the central bank may continue to talk down speculation for another round of quantitative easing, and we may see the committee bring its easing cycle to an end as the region gets on a more sustainable path. In turn, the FOMC may start to discuss a tentative exit strategy over the coming months, and the central bank may look to normalize monetary policy towards the end of the year as Fed officials anticipate to see a stronger recovery in 2013.

Recent Economic Developments

The Upside

Release

Expected

Actual

Advance Retail Sales (MAR)

0.3%

0.8%

Consumer Price Index Core (YoY) (JAN)

2.2%

2.3%

Average Weekly Earnings (YoY) (MAR)

1.9%

2.1%

The Downside

Release

Expected

Actual

New Home Sales (MoM) (MAR)

1.9%

-7.1%

Existing Home Sales (MoM) (MAR)

0.5%

-2.6%

Change in Non-Farm Payrolls (MAR)

205K

120K

The resilience in private sector consumptionpaired with the stickiness in underlying inflation may encouragethe FOMC to drop its dovish tone for monetary policy, and the shiftin the policy outlook may push the EURUSD back towards 1.3000 asmarket participants scale back bets for QE3. However, we may seethe Fed continue to endorse its 2014 pledge amid the ongoingweakness in housing paired with the protracted recovery in thelabor market, and central bank Chairman Ben Bernanke may keep thedoor open to expand policy further in an effort to balance therisks surrounding the region. In turn, we may see the EURUSDcontinue to retrace the decline from earlier this month, and thepair may ultimately breakout of its bearish formation as market participants increase bets for moreeasing.

Potential Price Targets For The Rate Decision

A look at the encompassing structure sees the EURUSD trading within a broad descending channel formation dating back to the August with the pair holding just below the 50-day moving average at the 1.32-figure. Key daily topside resistance stands at the confluence of channel resistance and former trendline support at 1.3255 with only a breach above short-term channel resistance dating back to the February highs, currently at 1.33, negating our bearish bias. Daily support rests with trendline support dating back to the February lows at 1.3040 backed by the 1.30-handle and the 38.2% Fibonacci extension taken from the October and February crests at 1.2865.

Our 30min scalp chart highlights interimsupport at the 100% Fibonacci extension taken from the April 8thand 16th troughs at 1.3175 backed by the convergence of channelsupport and the 78.6% extension at 1.3135. A break below this leveloffers further conviction on our directional bias with such ascenario eyeing support targets at the 61.8% extension at 1.3105,1.3085, and the 38.2% extension at 1.3060. Topside resistancestands with the 123.6% extension at 1.3215 backed by the 138.2%extension at 1.3243 and 1.3260. Should the print prompt a bullishdollar response, look to target downside levels with a break belowthe 1.30-threshold risking substantial losses for the singlecurrency. As the FOMC highlights the biggest event riskfor the next 24-hours of trading, we will keep a close eye onthe majors for a potential scalp .

How To Trade This Event Risk

Trading the given event risk may not be asclear cut as some of our previous trades as Fed Chairman Bernanke is scheduled to speak at18:15 GMT, but the developments coming out of the meeting couldpave the way for a long U.S. dollar trade should the central bankstrike an improved outlook for the economy. Therefore, if the Fedraises its fundamental forecast and sounds a bit more hawkish thistime around, we will need a red, five-minute candle following theannouncement to establish a sell entry on two-lots of EURUSD. Oncethese conditions are fulfilled, we will set the initial stop at thenearby swing low or a reasonable distance from the entry, and thisrisk will generate our first objective. The second target will bebased on discretion and we will move the stop on the second lot tobreakeven once the first trade hits its mark in order to preserveour profits.

On the other hand, the Fed may strike a balanced tone for the region as the region remains vulnerable to external shocks, and the committee may preserve a cautious outlook for the economy amid the ongoing slack in private sector activity. As a result, if the FOMC preserves its 2014 pledge and sees a risk for a slower recovery, we will implement the same strategy for a long euro-dollar trade as the short position laid out 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)

MAR 2012

3/13/2012 18:15 GMT

0.25%

0.25%

-39

-26

March 2012 Federal Open Market Committee Interest Rate Decision

The Federal Open Market Committee maintained its current policy stance in March amid the ongoing slack within the real economy, but we saw the central bank soften its dovish tone for monetary policy and raise its fundamental assessment for the region as the recovery gradually gathers pace. Indeed, the U.S. dollar bounced higher following the rate decision, with the EURUSD falling back below 1.3100, but the greenback consolidated throughout the North American trade to end the day at 1.3081.

--- Written by David Song, Currency Analyst andMichael Boutros, Currency Strategist

To contact David, e-mail dsong@dailyfx.com. Followme on Twitter at @DavidJSong

To contact Michael email mboutros@dailyfx.comorfollow him on Twitter @MBForex.

To be added to David's e-mail distribution list,send an e-mail with subject line "Distribution List" todsong@dailyfx.com.

To be added to Michael’s email distributionlist, send an email with subject line “DistributionList” to mboutros@dailyfx.com

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DailyFX is the forex news and research arm of FXCM, Inc (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.

Original Article: http://www.dailyfx.com/forex/fundamental/daily_briefing/daily_pieces/trading_news_reports/2012/04/24/EURUSD_Trading_the_Federal_Open_Market_Committee_Rate_Decision.html

DailyFX is the forex news and research arm of FXCM (NYSE: FXCM), which provides currency trading and brokerage services and is an advertiser on TheStreet websites. Any opinions, news, research, analyses, prices, or other information is provided as general market commentary, and does not constitute investment advice. Dailyfx will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on such information. Currency trading involves significant risk of loss. Individual authors may hold positions in the currencies discussed in the article.

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