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Trader's Guide to the FOMC: DON'T PANIC!

Last updated 6/19/2012 5:04 PM EST (GMT -5) 0 Comments - Add your comment

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Neal Gilbert

Technical Analyst, GFT

Follow @FXexaminer

Risk On? Risk On!

Price action during the North American trading session was a little confusing to many pundits today.  Coming in to the start of the trading day, Europe had some less than confidence inspiring results in EZ ZEW surveys, and UK Construction and CPI data. US Housing Starts were also a big disappointment. US Building Permits were better than consensus, but nothing to write home about. Despite all of the negative data, risk based currencies marched onward and upward with the EUR/USD taking out the 1.27 handle; GBP/USD rallying up to 1.5750; and AUD/USD touching 1.02 just to name a few. It was almost as if the market was rallying stronger as more bad data came across the wires.

The reason we saw so much optimism today really doesn’t have anything to do with today’s events; it is primarily based on what MIGHT happen tomorrow. As you may already be aware, the FOMC will be making a monetary policy decision tomorrow afternoon New York time that could have global economic implications. At 12:30pm EDT, the fireworks start with the release of their interest rate decision which will garner virtually no attention because it is not expected to be changed. As with any good fireworks display, the grand finale is what everyone is going to be paying attention to. At 2pm EDT, the Fed will release their 2 year projections for inflation and economic growth, along with each member’s interest rate forecast followed by the Monetary Policy Statement and press conference with Fed President Ben Bernanke at 2:15pm EDT.

Market watchers will be waiting with bated breath for any form of the phrase “Quantitative Easing” to come out of Mr. Bernanke’s mouth. As of right now, many investors expect some form of monetary easing to be announced by the Fed tomorrow afternoon. And in a nod to the “Buy the Rumor” half of the “Buy the Rumor, Sell the News” saying in trading, the markets are doing just that; buying in anticipation of that flood of money. The likelihood of QE3, though, in this analyst’s opinion, is slim. Personally, I think we are much more likely to see either Operation Twist 2 or an extension of currency swap lines with the ECB as I mentioned last week .

Why no QE3 you ask? Just think of the ramifications of a massive increase in liquidity and spending in this political season. The first two versions of Quantitative Easing were not very popular with the general public, and a third iteration would probably be lampooned. Yeah, big banks on Wall Street would be happy, but it would be a serious talking point for the “apparently” more fiscally shy opposition. And do you really think another Occupy Wall Street movement wouldn’t pounce on the US government helping out the 1% again? I’m sure Mr. Obama has Mr. Bernanke on speed dial and would strongly suggest that there be no mention of QE3. If there is no QE3, it really doesn’t matter what else is announced, Mr. Market will be heartbroken, and then we can fulfill the other half of that old saying in trading and “Sell the News.”

EU Does Away With Rating Agencies

From the “Can They Really Do That?” department comes a story from Bloomberg that EU lawmakers have approved an amendment to end the use of credit rating agencies, and a call for the EU to issue their own ratings. Call me naïve, but I believe that they don’t really have the power to make the markets ignore respected businesses whose job it is to inform investors on which investments are good and which are bad. Now don’t get me wrong, the EU has the right to ignore the professionals and issue their own ratings, but I sure hope they don’t believe global investors will be paying much attention to the official EU ratings. It's kind of hard to see the problem if you are standing right in the middle of it.  If the EU were grieving, they would be on step one of the process which is DENIAL. If they deny that there is a problem and just try to manipulate it to their own liking, they have skipped ANGER and moved right on to BARGAINING. The good news is that all we have left is DEPRESSION before they finally ACCEPT their situation. So here’s for hoping they aren’t DEPRESSED long.

A Real Greek Government? Really?

Talk out of Greece is that the New Democracy Party, who won the largest amount of seats in this past weekend’s election, has formed a coalition with PASOK and the Democratic Left. PASOK leader Evangelos Venizelos says it could be ready by midday tomorrow, with Antonis Samaras taking the helm as Prime Minister. It is hard to not be skeptical on any news from Greece simply because we have been led to believe something only for the exact opposite to happen many times over the past few years, but it seems sincere this time around. I know, I know, I sound like the girl who keeps taking back that guy who treats her like crap, but come on, this makes sense this time! Right?  If nothing comes of this, it could be a perfect storm of sorts if the Fed doesn't introduce QE3 as well.  Consider the situation: More political turmoil in Europe + No QE3 = A severe selloff and a piling of assets in to the safety of USD and JPY.

Looking Forward

As the Asian session gets ready to fire up, we will very soon see if the rally that started in Europe this morning will continue. There are some minor news events scheduled that could create a little volatility, but the most likely course of action for most traders will be to position for the FOMC. Being that the Asian session didn’t participate very strongly in the rally so far, there could be some significant buying pressure driving risk up even more.

For more intraday analysis and trade ideas, follow me on twitter ( @FXexaminer ) and/or Facebook (FX Examiner) and attend our daily Live Market Analysis webinars. Visit your local GFT website under “Getting Started” to sign up.   I was also recently interviewed for The Trader’s Podcast, a two part interview which can be heard here and here .

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About The Author

Neal Gilbert, an avid follower of the markets, began working at GFT in 2006, educating new and experienced traders in an easy-to-understand manner. His focus has been teaching common technical indicators, risk management, and sharing his favourite trading strategies. His Braving the Rapids strategy guide can be found on GFT’s website.

Neal conducts live webinars throughout the day, including his” Long and Short of It,” which is a Fundamental Live Market Analysis webinar centred on key economic releases. He also conducts webinars in Basic and Advanced Technical Indicators, Volatility and Risk Management, Trader’s Edge, and Fibonacci Trading and Theory.