Waiting for a major economic catalyst that could rock the forex market out of its slumber? The upcoming FOMC interest rate statement just might do the trick!
Why is the FOMC statement important?
This particular event tends to spark volatility among dollar pairs, as it indicates what Fed officials plan to do with monetary policy. Interest rate changes influence the rate of return for holding U.S. assets, which then affects the demand for and value of the Greenback. Even if no actual rate or policy adjustments are announced, the overall monetary policy bias of the U.S. central bank still has a huge impact on forex price action since it sets market expectations.
What happened last time?
During the previous FOMC decision in March, the Fed decided to carry on with its taper plan of reducing asset purchases by $10 billion monthly. This provided support for the dollar as the Fed refrained from turning all-out dovish despite the recent weakness in hiring, but what really gave the dollar a strong boost was Fed Chairperson Yellen’s hints that the U.S. central bank might be ready to hike interest rates around six months after asset purchases end. As you can see from the chart below, dollar bulls took this as a sign to charge!
It was only when the U.S. economy printed a bleak March NFP figure followed by a downbeat FOMC meeting minutes that the dollar returned most of its gains. Apparently, not all Fed officials are as optimistic as Yellen when it comes to their economic assessment and outlook. Dollar bears took over forex price action when market watchers realized that Yellen’s rate hike forecast was merely a personal opinion and not a consensus among FOMC members, dashing hopes of a Fed rate hike taking place in 2015.
What could happen this time?
The April FOMC statement could be marked mostly by caution, both on the side of FOMC policymakers and on the market watchers’ end. For one, Yellen might be more careful about dropping hints on actual policy tightening or a rate hike time frame. Concerns about the labor market slack and the slow economic recovery could also be included in the statement, although the Fed is still widely expected to keep tapering.
As for forex market participants, a more cautious reaction to any Fed remarks might be seen. If there’s anything traders learned from the March FOMC hullaballoo, it’s that any changes in rhetoric must be taken with a grain of salt, even if it comes from the head of the Fed herself. Analysts predict that the price action during and after the FOMC event might be subdued, as traders are still waiting for more economic clues from the NFP release at the end of the week.
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