Trends and market movements in the foreign exchange / currency futures markets are driven by interest rate differentials and trends in interest rates, As such; currency futures are often a great trading vehicle after central bank policy setting meetings.
Today’s FOMC meeting was a good opportunity for potential changes is US interest rate policy, thus an event that could cause big moves in the currency futures. (This is a time I prefer watching the currencies rather than stock indices, which have more factors in play.)
To highlight today’s opportunity, a number of currency futures had breakout setups for today. Before the meeting many traders are don’t want to commit to a market direction, not knowing what the upshot of the meeting will be. After the meeting markets often make a large move in one direction as traders adjust to updated fundamentals.
The Euro had a breakout setup for today. In the September FOMC meeting, the fed cited global markets and the global economy as a reason for caution on raising rates. This gave the perception of a more dovish Fed and markets reacted accordingly- many analysts pushed their forecast for a first rate hike out to months into 2016.
Many were surprised when the Fed cited international factors so explicitly in its policy making criteria as its mandates are employment and inflation. As a result of the confusion, a number of Fed officials spent the next weeks walking back the perceived dovishness from the September meeting.
Today’s meeting was an opportunity to get better clarity as to Fed policy; something more than the cacophony of comments we got out of Fed officials. Because of this, there was the potential for big market moves (in either direction) if Fed policy was clarified.
The Euro currency futures were ground zero of interest rate policy changes and concurrent exchange rate movements. While there was confusion as to when (or if) the Fed would raise interest rates, the ECB hasn’t explicitly stated when (or whether) it plans to expand its quantitative easing, a proxy for lowering interest rates.
The Euro currency futures (the daily chart is above) had a breakout setup for today- Tuesday was an NR4 day and a doji bar. We would look for a potential breakout trade after the 1 PM end of the FOMC meeting; either a rally above Tuesday’s high of 1.1086 or a break below 1.1037 (Tuesday low) and 1.1004 (Friday low).
This morning we saw a small move above Tuesday’s high. There wasn’t rally much to read into this and it was a move for us to ignore, as it told us nothing about what the market was likely to do after 1 PM.
The communique after the FOMC meeting did provide a catalyst for a market move as the Fed discussed conditions for a potential rate hike at the December meeting. This was the Fed’s first mention of a possible rate hike (even if it was data dependent) and swung the pendulum from a perceived dovish Fed in September to a relatively hawkish Fed after this meeting.
This gave the green light to a rally in the USD and the Euro sold off hard as a result. The two downside reference prices were taken out minutes after 1 PM, triggering our breakout short sales. The selloff continued over the next hour, making a session low of 1.0905 a little before 2 PM.
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