Fed Meeting & Minutes

The market moves when the Federal Reserve Board is meeting! It seems to charge up the currencies to soar to new high levels or fall to new lows. Yet any sharp price movements are usually temporary or short-lived. Still, it pays to be in a good position to take advantage of these price movements.

The Federal Open Market Committee (or FOMC) consists of 19 members though only 12 members can vote. The FOMC meets to confer on the health of the economy and debate on monetary policy. The most market-moving part is their deliberations are the appropriate level of short-term interest rates.

Beyond this figure, the FOMC also makes a statement about their level of activism in controlling inflation and stimulating the economy.

The FOMC minutes provide insight into the Fed’s view of the overall health and strength of the economy, which directly affects the strength of the US Dollar. Also, the minutes provide more information about the Fed’s view of an acceptable level of inflation and how it intends to remain at (or near) this level.

Like the Employment Report, the minutes are closely watched by central banks, financial institutions, and traders around the world. A signal of economic strength can make the US Dollar rise while a sign of weakness or uncertainty can give strength to other major currencies, particularly the Euro.

The FOMC minutes are released eight times each year.

The FOMC meeting and release of the minutes have a very strong effect on demand for the US Dollar. A sharp increase or decrease in demand is the usual result though this level of demand is temporary.

Higher interest rates make the US Dollar more attractive for investment purposes. Any news of a strong economy will also increase the demand for the Dollar because foreigners will invest in US securities and businesses. These scenarios create a higher level of demand, subsequently raising the price and value of the US Dollar. Any other currency (base or secondary) in the currency pair will decrease in value and price.

Lower interest rates make the Dollar much less attractive to foreign investors, who will earn a lower yield on their investment. Hence, foreigners will invest in currencies in which they can earn a higher yield. This is particularly true if US rates fall below those of other countries with a major currency, particularly the European Union (Euro) and Britain (Pound). This would cause the value of the US Dollar to decline. Another factor that would put downward (bearish) pressure on the US Dollar would be news of a softening (or weakening) economy released in the FOMC minutes.

Traders watch Fed announcements and minutes very closely. The market attempts to read between the lines of the Fed minutes. As the Fed meeting approaches, the trading volume grows and volatility soars. Take advantage of the increased market movement, but avoid guessing what the Fed will do or how the market will react. The best course of action for a Forex trader is to be positioned to take advantage of any large price movement (80 or more pips), take profits quickly, and minimize your level of risk. Stop loss orders are essential during this erratic time.