Good morning, forex friends. Finally, the big day is here. The U.S. central bank Federal Reserve (FED) is likely to shake the market today. Are you wondering how to trade the FOMC? Let me help you out.

Federal Reserve Monetary Policy

Federal Funds Rate – At 18:00 (GMT), the FED is scheduled to release its rate decision. The FED is expected to leave it unchanged at 1.25%, but we never know when central bank changes mind to surprise the market.

Earlier in December 2016, the FED chair Janet Yellen renewed the dot-plot to three hikes in 2017. The first half of the year 2017 went as planned with two rate hikes in March and June. Likewise, the third rate hike seems imminent maybe now in September or in upcoming months. However, the odds are high for rate hikes in December.

FOMC Statement & Press Conference – It's the primary tool the FOMC uses to communicate with investors about monetary policy. It contains the outcome of their vote on interest rates and other policy measures along with commentary about the economic conditions that influenced their votes. Most importantly, it discusses the economic outlook and offers clues on the outcome of future votes.

What to Expect from FOMC?

Apart from the interest rate decisions, FED is also expected to talk about quantitative easing (QE). The QE is non-conventional ways to increase the money supply in the market and most of the major central banks are following this practice. Yup, the FED is also one of them. As the U.S. economy is on track and consistently getting better. Therefore, the Yellen can talk about QT (quantitative tightening).

Balance Sheet // Quantitative Tightening

The FED can shift the locus of focus from FED fund rate to the reduction of Balance Sheet. As we know, in order to accommodate the economy, the FED started purchasing the asset back security and now its balance sheet has reached to $4.5tn.

The FED is highly expected to shift its focus from FED Fund Rate to unwinding quantitative easing to signal its confidence in the economic recovery.

Impact – If the FED starts unwinding quantitative easing by reducing the size of Balance Sheet, we may see a slight spike in the Buck, but later the dollar is likely to drop as the December rate hike sentiment will be zero.

Rate Hike – If the FED unexpectedly hikes the rate from 1.25% to 1.50%, this is going to cause some serious gains in the USD. So be ready for surprises from the FED.

Dot-Plot – Lastly, if the FED removes third rate hike dot from the 2017's dot-plot, the dollar will plunge dramatically causing bullish waves in all the direct currency pairs and commodities.  

Personally, I think we should stay away from the market before the release of FOMC, or we need to take quick trades with the proper stop loss following the FX Leaders Risk Management Strategies. Good luck fellows and keep following for more forex trading signals and trade ideas.