USD Traders Shift Focus to FOMC Rate Decision

The Federal Open Market Committee is expected to keep their benchmark interest rate unchanged at 0.25% as the recovery continues to face major hurdles. Last month, the committee said that rates are likely to remain “exceptionally low for an extended period.” This wording has been unchanged from the previous nine releases, and any change in language at tomorrow’s meeting will likely stir volatility in the FX markets.


According to the Credit Suisse overnight index swaps, traders are pricing in 0% chance that policy makers will hike its key overnight lending rate twenty five basis points at its rate decision tomorrow. This assumption by market participants comes to no surprise as the U.S. recovery is not yet cemented. The unemployment rate in the world’s largest economy rose to 9.6% in August from 9.5% the previous month to mark the highest level since May, while the monster employment index pushed lower for the second consecutive month in August, which in turn both weigh on household spending. Despite the dour situation in the U.S. labor market, the Fed may turn out to be more optimistic about future employment largely due to the fact that workforce has been depressed so much that any rise in demand will require more hiring. Aside from the labor market, rates will likely remain at their record low until at least the middle of next year as credit conditions remain tight, while the housing market remains depressed.

On the other hand, a narrower trade deficit, gains in factor output, and a rise in retail sales (lead by holiday discounts and back to school shopping) have bought the central bank some time on whether to provide additional monetary stimulus. All in all, subsequent comments to the rate decision will likely dictate price action during the North American t trade. A more dovish Fed than the previous meeting may spark risk aversion as the global economy faces major uncertainty, while an optimistic central bank will validate additional gains in the U.S. dollar against the Japanese yen. Besides the growth outlook, traders will pay close attention to the inflation expectations.

After breaking above its descending channel, the pair as of late has halted its three day advance, but looks to of found support at the 50-day moving average, while the 10-day SMA has crossed over above the 20-day SMA, which is indicative of further gains. At the same time, our speculative sentiment index is well off its extreme high of 7.0, and now sits at 1.94. Indeed, the SSI still signals for gains; however, traders should not rule out a change in the reading as a second round intervention by the Bank of Japan lingers.