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The upcoming FOMC Meeting holds high expectations for easing steps by the Federal Reserve – steps that can help stimulate the economy that has slowed down. Here are possible scenarios for this decision, and possible market reactions.

On Tuesday, August 10th, at 18:15, Ben Bernanke and his team will release the FOMC statement. I’ve already written about how Bernanke can print dollars and weaken the greenback, but as the market already prices in such steps, the impact on the market depends on the details:

  1. Massive Dollar Spilling: The statement consists of a deep concern for a double dip recession and declares a program to buy assets in hundreds of billions of dollars. This is the worst case scenario. Showing worries might send traders away from the dollar. Spilling hundreds of billions of dollars in a new Quantitative Easing program means similar impact as in March 2009 – the dollar lost 600 pips against the Euro.  Bernanke wouldn’t want to create panic. Probability: Low.
  2. Renewal of asset buying: The statement shows concern about the slowdown and states that the current asset buying program that was stopped in March 2010 will be temporarily resumed at a moderate scale.  Taking careful measures and carefully wording the statements is what the Fed does best. This scenario is bad for the dollar, but as the market already expects this, the dollar will slide down moderately. Probability: High
  3. Change of wording: The statement shows concern about the slowdown, and vows to act if necessary, without any measures taken. Changing the wording of the statement without taking any steps is something that Bernanke mentioned in a recent public appearance. The market is expecting real steps to be taken, especially after the Non-Farm Payrolls, and while option won’t come as a huge surprise, not spilling dollars will boost the dollar, and erase some of the Euro’s recent gains. Probability: Medium.
  4. No change in the statement: This means that the only dovish part in the statement is the pledge to keep interest rates low for “an extended period of time”. This “wait and see” policy, that happened so many times in the past will be a big surprise now, and will turn the recent gains of EUR USD to a case of “Buy by the rumor, sell by the fact”. The dollar will significantly rise. Probability: Low.

The chance of an optimistic statement about the economy is highly unlikely, and needless to say, the chance of a rate hike is zero. Inflation is no threat – the Federal Funds Rate will stay at a maximum rate of 0.25%.

What do think will happen?

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