Forex Traders Guide To FOMC Meetings
Remember in the Main Fundamental Forces In Forex article we said that certain fundamental events can lead to large movements in the Forex markets? And we named a few such as the GDP, unemployment rates, and even interest rates. In this article, we will look at the fundamental event known as the FOMC Meeting.
FOMC (Federal Open Market Committee). Now you may wonder why this is considered as one of the most important fundamental events on the economic calendar if there are so many currencies in the world as well as the fact that each Central Bank controls its own policies and systems.
The simple reason for this is because the US Dollar is the world’s reserve currency and so economic and financial developments that occur in the US economy, affect other economies/currencies.
It is important to take note of who. Who controls interest rates as well as the most valuable opinions about the financial and economic climate of the U.S?? These people are known as the policymaking body; they are 12 individuals in total comprising of governors and Bank presidents.
For a more comprehensive list of who the governors and bank presidents are, you can visit the Federal Reserve website for a clear understanding of the kind of power each member holds.
The FOMC Meeting occurs roughly 8 times in a year (around every 6 weeks). The Federal Open Market Committee meets to discuss economic conditions within the country and any possible changes that need to be made for economic development.
Sometimes unscheduled meetings are held and it is important for Forex traders to be alert when this occurs. The point of this is to implement policies that get the economy out of a slump or to maintain growth in production and the economy. This is done by each of the 12 members voting for proposed changes.
What do the members vote for?
2 terms are crucial to remember when listening to the news about this event (or any financial news concerning the Central Bank). Those terms are “Hawkish” and “Dovish”.
Hawkish – These are the members that want the rates to rise because they are guarding against excessive inflation.
Dovish – These are the members that want to see interest rates lowered or an increase in quantitative easing to stimulate the economy.
Now that we have familiarized ourselves with these terms, we can understand what the individual members of the FOMC are voting for. Besides voting for interest rates increasing and decreasing the board votes and makes decisions on the monetary policies and mediums to develop the economy.
FOMC Meeting objectives
Since the US Dollar is the world’s reserve currency the currency needs to show stability and so the members often look to conduct monetary policies to achieve macroeconomic objectives on issues such as maximum employment and stable prices.
With short term and long term goals, all for the benefit of their country. The simplest way to conduct policy is by adjusting short-term interest rates to drive the economy forward.
What is affected by FOMC Meetings?
You will find that there are various instruments affected by this event from; indices, bonds, commodities, and Forex pairs.
For Forex traders we will look at 2 hugely affected instruments…
1. The Dollar
If there are more Hawkish members at a particular meeting, traders can expect the US Dollar to gain strength, because of interest rates rising. This would mean the average investor stands to make more off of their savings/investments. There are a couple of negative pointers too, so at the end of the day, movements will be determined by big Banks and other institutional traders.
Gold is considered to be the “safe haven” for investors when currency markets, indices, and bonds aren’t performing well. In the case that the FOMC has a negative outlook on the US economy, gold should strengthen as traders and investors look for a place to lay their money (so their investments do not lose value in the short-term nor the long-term)
Now, there are many ways traders look at the opportunities that present themselves through these meetings and every market participant approaches the news event differently, all hoping for a positive result. Some trading strategies allow for traders to use both technicals and fundamentals.
If you are a trader looking for a strategy or multiple strategies to trade the FOMC Meeting minutes, you can head over to Leading Trader.
This event is important because Forex traders realize that the most seemingly inconsequential of words used by members of the FOMC could cause a major uproar within the market, and those are the moves traders look to capitalize on.
Word of advice: Be sure to do analysis and familiarize yourself with the movements made in the market and answer critical questions like “why that move happened?”, “how you can capitalize?”, “what moved the market exactly?”! Pay attention to the language used by these individuals and only risk your capital when you are confident that your battle plan will work.
Learn, adapt, and make profits.
Happy Trading Traders!