If you like to trade Economic News Events, you will know that Central bank Interest Rate decisions are almost always big movers of the markets.
When a Central Bank raises interest rates it basically makes its own country’s currency more valuable, but can increase the cost of running a business and personal borrowing and, of course, mortgages.
A Central Bank uses interest rates to balance Inflation, Consumer and Corporate Spending, Exchange Rates and Trade Balance among other factors.
Arguably, the US economy is the largest economy in the world so these interest rate decisions have a more global effect that those of other Central banks.
The dates for the US Federal Rate interest Rate decision can be found on your Valutrades Economic Calendar and occur 8 times per year.
Also, on your calendar you may note the “FOMC Statement” and “FOMC Economic Projections”.
These can be equally as important as the actual decision as investors will be looking for hints on future monetary policy and future rate changes.
As well, there are 12 members of the Federal Open Market Committee (or FOMC) who vote on interest rates and analysts and investors are paying attention to each member and how many voted for what.
These members also contribute to the famous “Dot Plot” which indicates their intentions for the future.
Along with this, 4 times per year, the FOMC has a Press Conference and we can see by the economic calendar that this one occurs just 30 minutes after the Federal Fund Rate announcement.
Again, this is a key vehicle for the Fed to communicate with the markets and, with reporters’ questions, analysts and investors are looking for subtleties in the answers of the Fed Chair as they look for clues on future monetary policy.
To give us an idea of what happens, the following is a screen recording of both the Fed Rate Announcement and the following press conference.
We can see from the Valutrades Economic Calendar the rate was predicted to rise so let’s see how it goes.
We have set up 2 profiles in MT4. This one is called “US News M1” and shows the USD Major pairs on one-minute charts.
We also have an indicator loaded called “Spread Indicator” and we have set our chart properties to show both the Bid and the Ask lines.
Just before the announcement, market liquidity becomes scarce and the spreads widen.
The announcement is made and, even though the interest rate rose, the USD fell quickly.
Why did price action react in the opposite direction than we thought?
Often, these rate changes are already priced into the market and other factors, like the FOMC statement, are what actually drives price.
So, even if we assumed that we know that the rate was going to rise, or, we just followed price action, why couldn’t we enter the trade here and get out here?
Simply put, with the lack of liquidity you will not likely be able to close your position where you want and, due to the fact that your trade was one of the last ones in, your order would be closed last as well.
It is never a good idea to trade during periods of such high volatility and low liquidity.
Normally, when trading news events we wait for the spreads to return to normal and look for reversals on counter-trend moves.
Here we have a news event that did just that. Counter-Trend price action allows bargain hunters to fill orders and often the trend continues.
In the case of our screen recording, we switch to an MT4 profile we made earlier called “US News H1”, with hourly charts, and we can see that the news actually drove price action in the same direction as the trend on Cable, CAD and Gold.
For the next half-hour, even though the spreads had calmed down, price was quite erratic and we can see many candles with longer wicks indicating indecision.
Exactly 30 minutes after the announcement, the press conference starts and clearly the statement of Fed Chair was “Dovish” which sends the USD weaker.
Later, the comments and answers were “Hawkish” and the dollar rose slightly.
Paying attention to the FOMC press conferences and statements can present many trading opportunities.
We can now see when the Press Conference ended, price consolidated.
Just to recap:
- just like any news event the short time before, during and just after the Fed Interest rate announcement, price action and the spreads are highly erratic.
- just like any news event, we look for counter-trend moves, after the spreads return to normal, and look to reenter the trend.
- very often, the press conference by the Fed Chair, after the Interest Rate Announcement can offer trading opportunities.
Watch now the Video:
The information provided herein is for general informational and educational purposes only. It is not intended and should not be construed to constitute advice. If such information is acted upon by you then this should be solely at your discretion and Valutrades will not be held accountable in any way.