Fed Decision – 4 Scenarios

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Tension towards the rate decision by the Federal Reserve causes tight range trading the forex markets. Eyes are on Ben Bernanke’s statement, that will move the markets out of the range. Will he calm the markets?  Here are 4 scenarios:

The Federal Reserve will announce the new rate at 19:15 GMT. Since there’s a zero chance of a rate hike, eyes are on the FOMC Statement.

In March, Ben Bernanke stunned the markets with a huge, 1 trillion dollar printing program that sent the dollar down and the stock markets up for along time. Such a big surprise probably won’t happen this time.

Here are 4 possible scenarios and the probability:

  1. Talk of slow recovery / bad job market:The American job market is still in trouble, with the unemployment rate very close to 10%. Today’s ADP Non-Farm Employment Change showed a loss of 203K jobs, below expectations. If the focus is on jobs, than recovery is too slow. Needless to say, a rate hike isn’t in the horizon. Slow recovery means fear, and then last week’s dollar strength might turn into a  long term trend. Roubini’s scary words of “the mother of all bubbles” will echo, and the dollar will see an influx of buyers seeking for a safe haven. In this case, also the Yen will be sought after, giving an opportunity to short the Yen crosses. Probability: Medium.
  2. Talk of recovery with no rate hike: If Ben Bernanke focuses on the good GDP, and no inflation, he sees the full half of the glass. The fear that ruled last week will fade away, the dollar will resume the fall, and last week’s panic will be forgotten. Probability: Medium.
  3. Talk of recovery and fear of rising oil prices: In such a scenario, Bernanke also sees the full half of the glass, but will focus on inflation, and open the door for a future rate hike. In such a case, the dollar will gain strength from a possible boost from the interest rate. Probability: Low.
  4. Repeat of the last statement: If the FOMC doesn’t supply any news, there will be high volatility, but no long term effect on forex trading. A non-event will be forgotten, and will leave the focus on Friday’s Non-Farm Payrolls. Probability: High.

These are my scenarios. I’d love to hear your thoughts.

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About Author

Yohay Elam – Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I’ve accumulated. After taking a short course about forex. Like many forex traders, I’ve earned a significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I’ve worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.