The currency market pays close attention to the FOMC meeting schedule, as this will provide information for traders about the currency’s value. The minutes, which summarize key discussions and decisions from the FOMC meeting, are released three weeks after the meeting. The transcript is released five years after the meeting.
Interest rate decision affects
The central bank determines the policy rate by measuring the aggregate money demand of the economy. It expects i$ changes to affect other economic variables in the opposite direction. If i$ increases, money demand will decrease. Otherwise, it will increase. This cycle is called “regression,” and it is not deterministic. A central bank’s policy rate change will have a significant effect on other economic variables, such as the value of the dollar and the value of the euro.
In the above diagram, interest rates affect the demand for real money. If the demand for real money increases, households are more likely to allocate assets to interest-bearing accounts, i.e., savings accounts and investment accounts. Although these accounts are not classified as money, they are the primary source of funds for lending in the financial sector. In addition, changes in total money demand affect the supply of loanable funds and, therefore, interest rates on loans. You must know about the fomc meeting schedule before starting trading.
Market sentiment affects currency values
One of the most important factors that influence currency values is market sentiment. Market sentiment can be influenced by various innocuous or extraneous factors, such as local geo-political events, quarterly company results, or mergers and acquisitions. Generally, however, the impact of these factors is relatively short-term and is only visible when looking at weekly or monthly data.
In the year 2011, the economic crisis in Greece had an impact on exchange rate markets and dampened market sentiments. In 2002, geo-political factors dampened exchange rate market activity. Similarly, in 2001 and 2002, market sentiments were very speculative. This paper describes the research results of analyzing exchange rate data using both the time series approach and the log-scale method.
The Fed has also abandoned a key tool for setting market expectations. This tool, known as forward guidance, allows the central bank to set expectations for future monetary policy and minimize volatility. However, since forward guidance is not executed well, the Fed has been unable to use it consistently with credibility. As a result, it has been more difficult to execute it in recent years. Therefore, investors must look for other economic variables as a safety net in the meantime.
FOMC announcement on currency values
The impact of FOMC meeting schedule announcement on currency values is largely dependent on the Fed’s decision regarding interest rates. Members of the board serve for one-year terms, and each member contributes to the committee’s assessment of the economy. As such, currency values are often affected by the schedule.
The Fed’s July meeting will be centered on the possibility of raising interest rates, but the decision will also be based on projections for the next two years. Interest rates are currently at the neutral rate, which is one that accommodates a growing economy while limiting inflation to below two percent. The Fed is unlikely to surprise the markets by raising rates more than twice this year, but its actions could be interpreted as a signal that more hikes are ahead.
Strategies for trading on FOMC decisions
One of the most important economic events of the week is the FOMC meeting. The statement from the Federal Reserve Board is often followed by sharp price movements in stock markets. The Fed’s decisions often affect equities, bonds, and commodities, and investors can formulate trading strategies based on their expectations of interest rate changes and inflation. Long-term traders may increase their exposure to financial stocks while reducing their exposure to sectors with high dividends.
The focus of the meeting was the dot plot, and the market remained split on whether the dots would move. Most analysts thought most members would stand pat on rates, but some were seeing them move up as high as 0.375%. The Fed’s statement was also expected to change, indicating a potential taper announcement in November.