The First FOMC Statement for 2013: What to Expect?

Currently, the Federal Reserve is buying 45 billion USD in Treasury notes and 40 billion USD in mortgage-backed securities every month. The market widely expects the central to continue with its unprecedented bond-buying program and maintain the benchmark interest rate near zero.

In its statement last month, the Fed indicated that it would keep rates exceptionally low as long as the unemployment rate is above 6.5% and the inflation forecast is equal to or less than 2.5%.

Most market participants seem to be in agreement with the forecast, but I think we have to watch out for the possibility of increased dissension. While most FOMC voting members back the 85 billion USD quantitative easing program, there are a few who think that the central bank has gotten too aggressive.

James Bullard, for instance, said that the aggressive monetary policy is making him a little bit nervous. Meanwhile, Esther George warned that a prolonged period of zero interest rates could increase the risks of future financial imbalances and hamper attainment of the Fed’s 2% inflation goal.

Still, despite these risks, it’s pretty clear that the FOMC’s major concern remains to be the job market.

The central bank desperately wants the unemployment rate to go down, and it seems that it will spare no expense to make sure it happens. Until it achieves its goals, the FOMC will likely stay on course, keep rates low through at least mid-2015, and continue with its QE program.

EUR/USD 4-hour Chart

Looking at the 4-hour chart of EUR/USD, I see a bullish flag pattern forming right now. If this continues until tomorrow, the FOMC statement may just prove to be the catalyst to break EUR/USD out of its consolidation.

The way I see it, there are two potential scenarios that could play out depending on the result of the FOMC statement:

a) If the Fed sticks to its guns and continues its bond-buying ways, then I think we could see an upside break on EUR/USD. Remember, more bond buying makes the dollar weaker, so it only makes sense for traders to dump their dollars.

b) On the other hand, if we see increased dissent between Fed members, it may cause traders to reevaluate their bias on the dollar. Increased dissent could lead to a sooner-than-expected withdrawal of stimulus measures, which should help boost Greenback. Thus, if we hear any signs of conflict between Fed officials with regards to monetary policy, it could lead to a sell-off in EUR/USD

Of course, there’s no telling what may happen, so if you happen to have any positions open, make sure you keep those stop loss orders in check! If you don’t feel comfortable leaving your trades open during the release, there’s no shame in closing them and sitting on the sidelines!