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What options does the FED have?

Posted Wednesday, September 21, 2016 by
Skerdian Meta • 2 min read

We´re over the BOJ now and the attention is on the FED. I´m saying we´re over, but that´s only for the time being, until the FED is out of the way. When the FED fades, the forex market will come back for the Yen pairs, as we said in our previous update and the next leg of the Yen uptrend will resume. 

But, enough about the Yen for now. Let´s get over with the FED´s meeting which is coming in about an hour, because we´ll reassess the situation of the JPY tomorrow. What path is the FED going to take? Of course, we don´t know that; they might surprise us, but we can have a look at their options.

No rate cut – Hawkish comments

We´re going with no rate hike first because the odds of a rate hike today are just 22%. If the FED stays put, then they will likely attach a hawkish statement with that decision. The time is running and many FED members have supported the idea of 2-4 hikes this year, so they will have to strongly hint a rate hike in December, they have no choice. If they go full bearish, then the forex market will go mental in December when the hike the interest rates. 

If this is the case, then the first knee-jerk reaction would be negative for the Buck. I don´t know exactly how many pips the USD will dive, it might be 50 or 200 pips, but that would be a good time to buy it as the knee-jerk reaction fades away.  

Rate cut – Neutral/dovish comments

If the FED surprises the market and cuts the interest rates then the surge in the USD is likely to be stronger and last longer than the decline in the opposite scenario. The market is not expecting it, so the surprise factor will hype the move.

The FED doesn´t want to elevate the market expectations for another rate hike, so I expect a dovish statement attached to this decision. But in my opinion, it won´t be that easy to kill the market expectations, just look at the Yen. So, the Buck might enjoy some bids in the coming sessions/days even after the initial surge. 

These are the only two options the FED has. They can´t cut the interest rates and be hawkish, as well as they can´t sit on their hands and be dovish. If you need some support and resistance levels to use as entry/exit points, then you can check out our second market update today. 

 

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