Don’t make trading the FOMC more difficult than it needs to be

These days, it seems like every data point and event needs to be dissected and analysed a thousand ways in an effort to come up with an expected outcome. Well, we like to keep things simple at ForexFlow so this is going to be the most simple trading preview you will read today.

I could list 20 different ways the statement might change to reflect a change at the Fed. I could do the same for Powell in what he says after but it’s all meaningless until we see/hear exactly what the Fed is thinking. So, why bother guessing? It’s not as if we can read the 15/20 headlines that will come out with the announcement quick enough to trade them.

To make things simple we can easily work out the reactions based on what we know and what is expected.

Simple No.1 – What do we already know?

  • The economy is doing fine
  • The consumer is doing fine
  • Inflation is at target
  • Housing is having a wobble
  • The latest survey data is a little weaker

Simple No.2 – What’s the Fed’s likely reaction to No.1?

  • Making sure that they acknowledge that the economy, consumer, jobs and inflation are positive i.e. meeting their mandate, which also includes “moderating interest rates”
  • Acknowledging that there has been some signs of weakness but not enough to warrant a policy change
  • Paying lip service to global worries like everyone else
  • Acknowledging that they are getting closer to neutral (which in reality is only 75bp’s more after a hike today, over the whole of 2019. Hardly neck breaking is it?)

Simple No.3 – Clear changes to policy to watch for

  • A change of hike frequency from 3 in 2019 to anything less
  • Any dissenters to today’s hike (All hikes have been unanimous so far). Factor that into the Neutral stance.

Simple No.4 – What’s the simple outcome for USD?

The market is expecting the Fed to take a more neutral stance (see here why the market is wrong to use the word dovish). So, if the Fed does turn more neutral, the reaction isn’t going to be as great as if they keep their language unchanged. The outcomes would be thus;

  • More neutral tone = Some USD weakness.
  • Unchanged = Greater USD strength.
  • No hike = Dollar gets mangled

Simple No.5 – Clear changes to policy would be;

  • A change in hike frequency in 2019 to less than 3 = USD negative (but factor that in with the accompanying language)
  • Any dissenters to today’s hike (All hikes have been unanimous so far). Factor that into the Neutral stance.

Simple No.6 – How to trade it?

Simple. Watch the levels. I’ll do a levels post closer to the event but we know the main ranges in play. For example, we’re 1.1200-1.1500 in EURUSD. If neither of those edges break (sustained break not knee jerk) over this event, the outcome isn’t deemed big enough to force a real change of prices. Identify the levels on your charts and watch how the price reacts. Keep stops tight and be ready to change course if the price action says so. For pure trading purposes, the headlines won’t matter 30 seconds after they come out. All that matters is what the price does with them. We can’t know what one dot moving on the dot plot is worth in pips so don’t bother trying to guess. Let the price action tell you.

Simple No.7

If you’re not sure, let the dust settle. This won’t be the last ever trading opportunity so take the simple option of sitting out, letting the market make its judgement, and then look for opportunities after.

And there you have it, 7 simple steps for the Fed. Be mindful that we’ll quickly switch to holiday covering into the end of the week, which might distort the new Fed picture, and also that the voting members change in 2019, so we get a whole new can of worms to open next year.

Ryan Littlestone

Pin It on Pinterest