The Fed decision on interest rates is due out at 2:15 EST today. The minutes leading up to and surrounding the decision are usually volatile and currency spreads can widen if there’s uncertainty. So if you do trade around that time, be cautious!
Now no one is expecting the Fed to raise interest rates, but all ears will be on the semantics of the meeting, that is, will they change their language. The Fed’s dovish stance on rates has persisted as the US dollar has fallen against almost all major currencies this year.
The zero-interest rate policy (ZIRP) that they have adopted has been in effect for just over 1 year. Will they tip their hand or provide statements of a more hawkish nature? The PPI numbers came out yesterday and showed a larger than expected degree of inflation, which some see as a sign that Bernanke et al will have to raise rates sooner than later.
In the meantime, the US dollar has picked up some short-term support and has been gaining ground against other currencies, particularly the Euro. But will that mark a trend reversal? Or is it just a brief pause?
As of late, the currency market correlations that we speak of often have started to break down. There are now actually days where both the dollar and the stock market can both be in positive territory. This tells me that we may be seeing a shift in the market response to risk-taking and that a rate hike may not be absolutely necessary for the US dollar to strengthen.
Remember, the forex market is a comparison market; that is, as a currency you don’t have to be the best, just be better than the rest!
So let’s see what Bernanke does today, but my feeling is it won’t be much. Weakness coming out of the Euro Zone in addition to Australia’s may be enough to see the dollar strengthen. Should he take a more hawkish stance, then expect the dollar to take off!
I’ll be following this event live and will hopefully have some charts to see what, if anything, takes place.
And of course you can follow this event on your own, by signing up for a free, live practice account here!
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