The FOMC statement and its short-term effects
Written by A Forex View From Afar on Monday, August 04, 2008A few times a year the Fed has a meeting in which they decide upon their most important economic lever: the overnight Fed Fund rate, and once the interest rate decision is revealed the Fed issues a statement giving a short description of where the FOMC members see the real economy going. The statement has only one purpose, and that is to stabilize the market. The July release was followed by events that showed the FOMC have a big role to play in market stability. Until now however the FOMC have failed to restrain inflation, nor to anchor price increase expectations, even though every statement from the recent meetings says inflation will moderate in the coming quarters, and that the Fed is closely monitoring the situation.
Tuesday will bring a Fed that will make an open statement assuring growth, and that fighting inflation are their main priorities (even if they are somehow opposed it would seem to both at this time). The other thing the Fed may say tomorrow is that the economy has possibly bottomed, although in the coming quarters the GDP number may not surprise anyone due that the rebates checks that have redistributed the growth potential.
If the hot air blows tomorrow, as is the norm recently, the short-term effect will be dollar strength across the market. The euro may very well test the support area of the 4h chart channel the pair is trading in right now. The swissy may test the daily chart topside areas that have held as support since May, and all as a consequence of a stronger dollar (relatively speaking), and higher treasury yields that may force equity traders back to their buying mode, at least for the rest of the afternoon.
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