Forex Trading Guide: October FOMC Statement

With a much-awaited blockbuster coming up this week, I think it’s about time I come up with a Forex Trading Guide to prepare y’all for the big event. What can we expect for the October FOMC statement?

As always, let’s go through our usual routine of understanding why the event is important, reviewing what happened last time, looking at what’s expected this time, and figuring out how the U.S. dollar might react.

What is the FOMC statement all about?

The monthly FOMC statement is when the Fed policymakers make their big announcement on monetary policy adjustments or interest rate changes. As such, this fomc statement us dollareconomic event tends to spark a huge reaction from the U.S. dollar and could even dictate longer-term forex trends for dollar pairs.

Fed officials usually divulge changes in their economic projections during the rate statement too, and these play a role in shaping policy biases. Even without actual interest rate changes, the Fed outlook makes a strong influence on market expectations, which then affect dollar price action.

What happened last time?

The September FOMC statement turned out surprisingly dovish, as Fed Chairperson Yellen threw cold water at rate hike expectations for next year. Most market participants expected the Fed to dump the “considerable time” wording when it comes to their time frame for keeping interest rates at their record lows, but this wasn’t the case since the FOMC raised fresh concerns on weak inflation.

This shift to a more cautious stance was enough for the dollar to slam on the brakes with its recent rallies. Fed officials warned that, even though economic data has been showing a lot of progress, the rising dollar might keep price pressures in check and wind up hurting overall economic growth.

What’s expected for the October statement?

The upcoming FOMC statement could prove to be an exciting one since it should mark the official end of the Fed’s stimulus program, with the central bank expected to withdraw the remaining $15 billion in asset purchases. However, a few Fed officials have recently spoken about delaying the taper now that weak inflationary pressures are becoming a major concern.

“A reasonable response of the Fed in this situation would be to invoke the clause on the taper that said that the taper was data-dependent,” declared St. Louis Fed President James Bullard in his testimony last week. “And we could go on pause on the taper at this juncture.”

A quick review of the latest set of speeches from Fed officials suggests that the committee is still divided on the issue, with some still lobbying to hike rates sooner rather than later. Any hints on when exactly the Fed might hike rates “sometime next year” could determine where the Greenback might be headed until the end of 2014.

How might the U.S. dollar react?

A more upbeat FOMC statement reassuring markets that the U.S. could stay resilient in the face of another potential global economic slowdown might be enough to keep the U.S. dollar supported and possibly allow the recent rallies to resume. On the other hand, indications that the U.S. central bank is also starting to feel the jitters about deflation and a likely euro zone recession might keep dollar gains in check.

As I’ve discussed in my blog post on the return of currency wars, central banks seem willing to do whatever it takes to keep their respective currencies from appreciating and weighing on price levels. It wouldn’t be so surprising if Fed head Yellen and her gang of policymakers stay on the same cautious route. Do you think this will result to a sharper dollar selloff?