Trading Forex - FED Rate Decision and Forex

For last few years there has been few, if any, surprises, when it came to FED interest decisions. We enjoyed long a steady period of gradual rate increases, followed by a prolonged time span of no action policy. For most part these outcomes have been expected and predicted by market analysts. Times have changed somewhat. Recent activities in stock and, especially, credit markets, created great uncertainty about the direction of interest rates. During their next meeting on September 18th, Federal Reserve policymakers will make a decision that just might prove momentous to all financial markets. Perhaps even for months or years to come. With the much publicized credit crunch causing a good size sell off in stock market, there are plenty of voices calling for a rate cut. Opinions are being raised that only FED decision to lower interest rates will help struggling housing market and stem the tide of foreclosures, bringing some stability to mortgage industry. Of course, these claims are being made by people directly involved in this beleaguered sector, like bankers, mortgage companies directors and Wall Street institutions who underwrote an avalanche of questionable loans and lending practices. As much as it is Federal Reserve role to maintain stable financial environment, they are not in a business of bailing out speculators and companies not adhering to sound investment practices. That much has been made clear by the Fed Chairman, Ben Bernanke. They have to under consideration a sleuth of additional factors, as well as the potential impact of any decision for some time into the future. Not an easy or enviable task. Clearly an argument can be made for each possible outcome, and why FED should cut, leave rates unchanged or even raise them. Each one of these scenarios will have an impact on Forex, more precisely, dollar denominated pairs. Conventional wisdom would make us believe that a rate cut will make USD even more unattractive than it already is. In this case farther slide would inevitable, straight into all time low levels against Euro, for example. And host of other currencies. Let s consider another scenario. FED cuts rates and this moves is followed by other central banks during their next respective meetings. Dollar strengthens and goes an 1-2 years long bull run. This particular outcome is just as plausible as any other. And why not? Long term chart are signaling for a break in current USD bear run. We will not know for a while. Here is when media comes in. After the fact there will be plenty of great explanations of why this or that happened. Should the dollar experience another sell off, we will read that it was caused by rate cut. If there is no reaction of any size, somebody will very handily explain “it was already priced in before decision”. Bottom line is, nobody really knows what the decision will be, and even less how the markets will react. What should one do? Not much. This particular FED announcement is the most anticipated in years. There will be great dose of indecision and, most likely, severely lowered liquidity. Initial reaction can easily be wild swings over 100 pips either way, maybe even both ways. Best thing to do really is to close any short term trades and watch the what happens. There maybe a valuable lesson for the future unfolding on the screens. Mike P. Kulej is a Chief Forex Strategist for Spectrum Forex LLC. He specializes in mechanical trading systems as explained on spectrumforex.com Spectrum Forex LLC offers numerous services to individual traders. With questions and comments e-mail him at kulej@spectrumforex.com