Fed Decision – No Middle Ground

There is no consensus about the outcome of the FOMC Meeting. This makes any decision a market major market mover. The option of a calm reaction in the forex market doesn’t exist. Here’s a preview for the upcoming FOMC meeting.

Image credit: Gage Skidmore

There is a consensus about the unchanged interest rate. It won’t be raised now. The wording of the FOMC Statement isn’t known – and this is what matters.

Before the previous FOMC meeting, I mentioned four scenarios. The outcome was the one with the highest probability was the copy-paste scenario – no change in the wording.

The bottom line of Ben Bernanke’s statement was that the interest rate would stay low for an extended period of time.This expected decision didn’t really impact forex trading, and the event turned into a non-event.

No option for non-event

Things have dramatically changed since then:

• US Non-Farm Payrolls that showed almost no job losses. This publication, on December 4th, was a small earthquake. It sent the dollar up. This normal behavior of good American data that sends the dollar up was hardly seen in forex trading since the beginning of the crisis. Good data would raise the appetite for risk and send the dollar down. In addition, the improving employment situation made traders think of a possible rate hike.
• Bernanke’s speech: On a speech on December 7th, Bernanke was rather dovish on the economy, and still talked about the problems that face the US. This downplayed the option of a rate hike. Only temporarily.
• Retail Sales were an excellent surprise last Friday, December 11th. This could be explained by Thanksgiving sales or by a correction of sales after many months of modest data. It didn’t really matter to forex traders: the dollar strengthened across the board, sending EUR/USD down. Since then, the dollar continued strengthening, breaking long term patterns in some currency pairs.
• Inflation: Producer Price Index rose more than expected. Although this isn’t the most important economic indicator out there, it is an inflation measure. If inflation is lifting its head, Bernanke can use the rate tool at his hand. Consumer prices will be published before the rate decision and are unknown at the moment. I’ll update this post with the figures.

So, we’re down to two scenarios this time:

1. New wording – dollar up: So, on one hand we have improving economic indicators, and maybe even fresh inflation. This could lead Bernanke to omit the word “extended” from his FOMC statement and the dollar would get a huge boost, continuing the trend from the last days.
2. Old wording – dollar down: On the other hand, Bernanke’s recent speech suggests that nothing has changed and this could lead to a repeat of the “extended period of time of low rates” wording. This would send the dollar down.

Maybe Bernanke has a totally different decision in mind. That would also be a surprise.

Update: Also on poll I ran with Currensee’s community, I got 53% thinking that the dollar will go up following the decision, and 47% that think that it will go down. Also the comments on the poll were split.