Monday, October 19, 2009

Playing the FOMC

USD/JPY and the Fed meeting

Right now, the focus should be on USD/JPY for forex traders. The FOMC is meeting, and expected to announce its rate decision at 2:15 p.m. Eastern. While no change is expected, it is the Fed's policy statement that will be of interest. And it is the policy statements that will provide some direction on the currency market.

Most likely to be affected by the Fed's statement is the USD/JPY currency pair. GFT'sKathy Lien describes, in FX360, possible scenarios connected with the Fed's later announcement:

If the Fed changes or drops their “the pace of economic is slowing” and” economic activity is likely to remain weak for a time,” statements, expect a rally in USD/JPY. If they talk of exit strategies and bond yields start to rise, we could see a more dramatic dollar rally. If the Fed disappoints by downplaying the improvements in the U.S. economy, we could see an ugly reversal in the greenback. The currency pair that will have the purest reaction to the FOMC decision will be USD/JPY.

As always, market movements are often determined by sentiment and by the interpretation of data. Because the Fed is so influential, it is natural that what is said by the body holds weight on the currency market.

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