FOMC Preview

I found just what I was looking for in a preview of the FOMC meeting tomorrow.  Being relatively inexperienced in macroeconomic events and their effects on currencies, I wanted someone to give me a general idea of what to expect tomorrow.  I know that no one knows exactly what will happen but it helps to put everything in context if we know the possibilities.

According to Richard Lee, Currency Analyst at DailyFX, the 2 most likely scenarios are for Bernanke to:

1. raise rates 1/4 point and keep the statement unchanged
2. raise rates 1/4 point and continue bias to raise rate

In the event of #1, the outlook is initially dollar bearish because it keeps the market guessing and is generally what most traders are hoping for.

In the event of #2, this will signal that the Fed is committed to raising rates yet again in August thereby creating a dollar bullish situation.

Scenario #3 is of medium likelihood and is for the Fed to raise rates 1/4 point and shift to a neutral  stance.  This would be bearish for the dollar because the signal here would be that the Fed is done raising rates.

Scenario #4 and #5 are highly unlikely. 

#4 is for Fed to raise rates a 1/2 point and move to a neutral stance.  This would create a mixed reaction because of a higher than expected rate change but a signal that this would be the final rate increase. 

#5 is for the Fed to raise rates a 1/2 point and maintain a hawkish bias.  This is highly unlikely yet good to know in the event that it ever does happen.  This event would obviously be quite bullish for the dollar.

Another thing of interest in this column are his positioning conclusions which could greatly affect my EUR/JPY position which as of now is still open.   He states that if the Fed produces a dollar bullish scenario, the dollar rally would probably be most pronounced versus the NZD, GBP, and JPY.  It would be least pronounced versus the EURO.  If the Fed produces a dollar bearish scenario, the opposite would be true.

Read the complete article 25bp and then what?

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