A FOMC Rate Hold Could Spark Bullish Dollar Sentiment

The FOMC is expected to cut the benchmark rate by 50 bps to a record low of 0.50%, as the U.S. economy is officially in a recession and expectations are that it will deepen in early 2009.

Trading the News: FOMC Rate Decision
What’s Expected
Time of release: 12/16/2008 19:15 GMT, 14:15 EST
Primary Pair Impact : GBPUSD
Expected: 0.50%
Previous: 1.00%



How To Trade This Event Risk

The FOMC is expected to cut the benchmark rate by 50 bps to a record low of 0.50%, as the U.S. economy is officially in a recession and expectations are that it will deepen in early 2009. Indeed, the half a million jobs lost in November has fueled concerns that consumers will completely retrench and curb spending further, adding pressure to already struggling companies. The service sector contracted the most in eleven years in November falling to 37.3 from 44.4. A reading below 50 signals contraction and considering the sector accounts for more than 70% of GDP then the possibility of expansion in the overall economy may be in the distance. Meanwhile, the ISM manufacturing report showed the sector contracting to a record low of 36.2 from 38.9. Although the Fed has given what the markets have asked in terms of monetary policy another rate reductions isn’t a sure thing. At 1.00% the central bank has little room to maneuver and may chose to save its ammunition for the future. The MPC has continued to look for alternative ways to help the financial system and increase available credit, such as the program to purchase the direct obligations of the GSE’s Fannie Mae and Freddie Mac. The FED is also expected to extend aide to the beleaguered auto industry until Congress can reconvene in January.

Despite the continued stream of dour fundamental data, we are starting to see results at least beat expectations, which may be a sign things are bottoming. Empire manufacturing, industrial production, U of M consumer confidence and pending home sales posted less than forecasted declines. The central bank may use this as an opportunity to give a vote of confidence to the markets by keeping rates on hold. Therefore, an end to easing would favor a long dollar trade (short GBPUSD), and we will look for a green, five-minute candle following the commentary to generate a short trade on two lots of the pound-dollar. Our initial stop will be placed at the nearby swing high (or reasonable distance), and our first target will equal this risk. Our second objective will be based on discretion and to preserve profit, we will move the stop on the second lot up to break even when the first lot hits its target.

Conversely, a rate cut would signal that downside risks to growth remain prevalent and the possibility of a zero interest policy will exist. The easing followed by bearish commentary would favor a short dollar trade (long GPDUSD), and we will follow the same setup for the short position as the long trade mentioned above, just in reverse.

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