FOMC Translation Guide: what the Statement Really Means for Forex Traders

Forex traders analyze the charts for high probability setups and then focus on hunting and catching the trade. But once in a while an event hits the radar that causes an equivalent of an earthquake in the Forex market.

The FOMC statement on Wednesday was such a heavy impact event. Traders have reported that the FOMC caused price to match a 6-year old record in price movement and a 3-year record in volume traded. This is not your typical day in the market, to say the least.

The USD lost substantial ground during the event with the EURUSD moving from 1.05 to 1.10, the GBPUSD from 1.46 to 1.5150 and the USJDPY from 121.40 to 119.30. See the image of the GBPUSD above.

What was so important in the words and statement of the Federal Reserve Chair Yellen? What is the important take away? And what kind of impact will this have on the charts? Find out below in the rest of this blog.

19- 3- 2015 gbpusd 4 hour

THE DIFFICULTY WITH FOMC NOWADAYS

A typical FOMC statement discusses many angles, developments and expectations, which can become quite confusing and, above all, annoying to interpret for traders. Whether the language and communication of the FOMC statement has become more complex is debatable.

BUT an interesting observation was made that the FOMC statement itself has substantially increased in its size compared to statements released before the financial crises. This was discovered during a study that measured the length of words of each FOMC statement.

This is probably a confirmation that the current economic environment is struggling, or at least that the FOMC is having more trouble with explaining it.

So if you are lost in the mumbo jumbo of the FOMC statement, then you are probably not the only one!

WHAT THE FOMC REALLY IS SAYING TO YOU

Many economic trend watchers and experts will refer to these items in the FOMC as the key pointers: the removal of the word ‘patience’ in the statement (regarding timing of rate hikes), the slower expectation of interest rate growth, the guarantee of no rate hike in April, the slight slowdown in economy, lowered inflation expectations, and lower export levels.

What does this mean? The removal of the word ‘patience’ in the statement was seen as Dollar bullish but all the other parts were USD bearish.

The conclusion is basically that the bearish news dominated the statement and the USD weakened quickly. The most bearish part was the mentioning of an economic slowdown AND the limit of how far up rate hikes could go in the future.

The reason: the FOMC had probably seen enough of the USD rally and thought that enough was enough. It wanted to send a clear message to the market that it had no intension of making continuous rate hikes in the near future (monetary tightening), although perhaps one increase was likely if the data confirms it.

“I don’t think it changes the market expectations. It brings the Fed more in line with what the market figured out,” said Scott Clemons, Brown Brothers Harriman’s chief investment strategist.

19- 3- 2015 eurusd daily 

WHAT NEXT FOR EURUSD?

With massive bullish impulse clearly visible on the EURUSD, it looks like some more EURUSD bullish retracement is likely but ultimately these 2 facts remain valid:

  1. The EUR introduced more Quantitative Easing in the next 1.5 years;
  2. The USD rate hikes might be limited in the future, but it will probably get a rate hike in Q4 2015 or Q1 2016.

Therefore, I believe that the EURUSD will sooner or later face renewed bearish pressure as the EUR weakness continues and the market reacts to a (potential) rate hike of the USD.

A rebound up towards the 38.2% or 50% Fibonacci retracement (purple) of the last bearish swing high and swing low could occur. But I am expecting the EURUSD downtrend to continue once it hits the Fib retracement or Fib targets (green) in the resistance zone (red box). The targets are mentioned in this article.

What do you think of the FOMC statement?

What are your expectations on the EURUSD?

Thanks for sharing and Happy Hunting!

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