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FOMC Influence in The Forex Market
Written by: PaxForex analytics dept - Thursday, 12 October 2017 0 comments
In the world of macroeconomics, there are two major components that investors must understand: monetary policy and fiscal policy. Understanding monetary and fiscal policy is particularly important to understand for the United States because of the weight of the decisions being made can be felt around the globe. The Federal Open Market Committee (FOMC) is the branch of the Federal Reserve Board that determines the direction of monetary policy. The FOMC meets several times a year to discuss whether to maintain or change the current policy.
Economic indicators play a huge role in the forex trading especially for traders who approach the market through fundamental analysis and trade the news. The Federal Open Market Committee (FOMC) interest rate decision is one of the most influential indicators for the US dollar and you can be sure after the news is released there is going to be volatility in the markets and volatility is what traders thrive on.
The announcement of whether the Federal Reserve has increased, decreased or maintained the key interest rate. The FOMC meets eight times per year to decide on monetary policy. After each meeting policy decisions are announced. The main task of the FOMC is to set the monetary stance by fixing the overnight borrowing rate, which essentially sets short-term lending rates in the US. Through this mechanism, the FOMC attempts to affect price levels in order
to keep inflation within the target range while maintaining stable economic growth and employment.
The US Fed rate announcement affects other interest rates, exchange rates and the supply of money and credit, which ultimately influences employment levels, economic output and inflation rates. Traders should be aware of the Fed interest rate decision dates, as they can move the markets substantially. The FOMC news release after each meeting can also be found on the Fed’s website. When the Fed interest rate announcement becomes public, it will usually affect the US dollar. Considering that US Dollar is taken as a main reserve currency, the announcement will cause a high volatility across the forex market.
Each Federal Reserve announcement can be a potentially high-impact event on the markets, and traders should prepare for high volatility during these announcements. Traders should be aware of the current situation in employment levels, inflation rates and economic growth, as the Federal Reserve considers all three of these indicators when changing and implementing monetary policies. When trading around FOMC meeting dates, traders should also implement proper risk management rules, or entirely stay away from the market, as these events will significantly increase price volatility.