The Significance of FOMC Meetings in FX Trading

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DXY has runned into resistance near 100. Trading View

It's been 9 years since the Federal Reserve has hiked rates. Thanks to today's FOMC meeting and Janet Yellen's post-statement conference, we may have to wait another year until the Fed hikes interest rates from their current historic low range of 0.00-0.25%. Here's a quick guide to understanding the importance of the FOMC meeting and how a trading plan can result from the eight times per year event.

 

The Purpose

The Federal Open Market Committee or FOMC allows the Federal Reserve to make a statement multiple times a year to explain the forward-looking Monetary Policy. Monetary Policy is a key detriment in the strength or weakness of any currency and is therefore of prime interest to FX traders. Monetary Policy is simply the actions that a central bank takes to direct the cost of money and credit through interest rates and its availability through Quantitative Easing to help an economy achieve their specific economic goals.

Currently, the Federal reserve finds themselves in a tough spot but may have found a way out of the corner the market was painting them into against their will. In short, the Federal Reserve found themselves as the only central bank over what appeared to be a relatively healthy economy as per Non-Farm Payrolls and other data points, which had them signaling via the Dot Plot that rate hikes would be in the near future in order to stem the potential inflation.

 

For those not familiar with the dot plot, it is very important for the long-term direction of any currency. The dot plot is a portion of the Summary of Economic Projection released with the statement that shows the interest rate expectations over the next 3 years by voting members of the federal reserve.

This makes the dot plot a very helpful tool as it helps to provide insight into how the committee members feel about economic and monetary conditions going forward. The March 2018 dot plot dropped from the January meeting causing the US Dollar to drop the most against the Euro in 3 years, which helps to show you how important the FOMC statement is to traders.

The Potential Trading Plan

FX traders often combine fundamental events like FOMC with technical events like the USD losing across the board after the FOMC statement. Traders who like to trade with the trend can look for different indicators to signal when to enter but in the end, all trend traders are looking for a series of higher highs and higher lows to signal an uptrend or lower lows and lower highs to signal a downtrend. Since summer of 2014, most pairs against the US Dollar have lost a significant percentage due to economic problems in multiple economies caused by the drop in commodities and a deflationary environment. 

The trading plan from an FOMC statement becomes more clarified the weeks after and therefore, is more appropriate to trend traders. Trading before, during, or after the event can be erratic and traders often complain about being whipsawed by such news events because all traders large and small are entering and exiting trades based on new information, which causes big moves that are hard to trade.

However, as you come out of the meeting by a week or two, if a new trend develops as defined by higher highs and higher lows then a trading plan can develop that combines fundamentals of a major event along with a clean technical trend worth following.

Major Central Bank Calendar for 2015