3 Do’s & Don’ts Before Fed Rate decision
10:30 AM (EST) Update
How cool is it that a bunch of peeps at the Federal Reserve have the power to get so many investors glued to their screens? It is said that with great power comes great responsibility, and Janet Yellen and her gang are (hopefully) putting a lot of thoughts into coming up with a rate decision. The wait will be over on Thursday and the answer will be revealed. Are you prepared for the outcome? Here are three tips to prep you up for FOMC statement trading.
1- Study the Potential Outcomes
Fortunately, there are not a ton of scenarios expected for this event. The Fed will either hike the interest rates or not. However it could get a bit more complicated if the Fed doesn't raise rates BUT hints that it WILL raise in December. It is fairly unlikely that they announce they are not going to hike ever, so that is out.
In yesterday's update, I covered the two scenarios and the possible impacts on the US dollar as traded versus the Euro (the EUR/USD pair.) Since this event will mainly impact Ms. USA on the forex dance floor, it is safe to say that similar analysis could be done on all other USD crosses.
After yesterday's disappointing US consumption report, today's August US Consumer Price Index release represents the last major data release before the Fed meets. The breadth of the impact of today's data has been mixed and Ms.USA has been pulled from both bull/ bear directions. Hope she can survive until tomorrow!
The reason why most recent data is important to be put into context is that the Fed is still well-short of the inflation half. Per the most recent update, Core PCE inflation is only +1.2% , below the +1.3% to +1.4% yearly range the FOMC projections suggested in June.
To give you a live view of market perspective, Fed funds futures contract implied probability showing a 30% chance of a rate rise tomorrow. This is mainly because the inflation target hasn't been met, and market participants have more or less priced out the possibility of a September rate hike.
2- Avoid trading USD crosses
Regardless of the outcome, the US dollar is bound to shake hard before/ after the statement release on Friday at approximately 7 PM GMT. While the adrenaline rush could be exciting, that is not how we trade Invest Diva University. A short term position in any forex pair that involves USD would make your trading style very much similar to gambling. While you may get lucky and make a bunch of pips on the ride, chances are that you could lose money as well. So leave Ms. USA alone for a day, dude!
Probably some of the less risky currencies to trade this week are commodity currencies such as AUD, NZD and CAD, paired up with the Asian safe haven, Mr. Japanese Yen.
As China’s stock market sinks and its economy slows these deep trade links are an increasing source of concern in Germany: Europe’s biggest economy is reliant on exports and has been a particular beneficiary of China’s sustained boom. But having expanded by 11 per cent last year, German exports to China increased by a modest 1.4 per cent in the first five months of this year. This makes Mr. Euro an unreliable trading candid at the moment.
However studying the Aussie dance floor over the past 10 years, you'd notice that Mr. Aussie has typically shown up-moves during the first three months of Spring in the Southern hemisphere (September - December.) So this could be a good time to have an eye on AUD and NZD crosses with the start of Spring in the Land Down Under and the potential start of Christmas shopping, while we are awaiting the USD turmoil during the Fed rate decision.
3- Loosen up your stops on long term positions
If you already are in a long term position in any pair, free up your closely calculated stop loss orders. While this event will mainly impact the US dollar, chances are that other currencies shake it up a bit as well to sympathize with Ms. USA. In order to avoid getting kicked out of your position for no good reason, move your stop loss further away from its original level for two days. You can move it back on Monday when the dust settles.
Best way to calculate your new stop loss order is using the Fibonacci retracement levels. For example, if your stop loss is currently near the 23% Fibonacci level, you could move it up to the 38% to stay safe.