Even though the Fed cut the discount rate (which is the rate at which banks can borrow) on Sunday by 1/4 point, the market still expects the Fed to deliver (at least) a 3/4 point cut in interest rates today.
Now, I tell ya...it's going to be interesting to see how this is taken by currency traders.
On one hand, if we get a rate cut, that would normally punish the dollar. However, since this rate cut has been so widely expected by the market, I say they've already "priced in" and accounted for the rate cut in the price of the U.S. dollar.
So that means that much of the recent fall was due to the fact that the Fed was expected to cut rates at today's meeting and so the market went ahead and drove the dollar down in light of that.
However, the market has looked for any excuse it could recently to run up the EUR/USD exchange rate. So if traders hop on that "band wagon" again, then we'll see the EUR/USD take another stab at the 1.60 level.
Being a "dollar seller" over the past several weeks has been a "no brainer". Now here's where it gets sticky.
So be careful when you're trading "dollar pairs" today. Remember that pros don't trade ahead of the announcement but they wait until well after the Fed announcement before they dive back in.
You might consider doing the same. Also remember, on days like this...if you're uncertain about the dollar, there are many great "non-dollar" pairs out there to be traded.
It could be the traditional carry trades (EUR/JPY, EUR/CHF, GBP/JPY, GBP/CHF, NZD/JPY, etc.) or it could be pairs like EUR/GBP which has been on a tear lately. Just make sure to never "box yourself in" by only limiting yourself to currencies against the U.S. dollar.
Also, the dollar pairs that tend to be the most affected upon a rate announcement are EUR/USD and GBP/USD and sometimes USD/CHF. The ones that CAN be least affected are USD/CAD and USD/JPY. However, with the recent market volatility, I'd steer away from USD/JPY today.
Those are some good things to know as you try to either avoid risk or thrive on it. At least this gives you some insights on what you might consider avoiding or focusing on.
Also keep in mind that the initial market response is not always the FINAL response of the market. Sometimes the dumb money jumps in ahead of the smart money and they take the obvious direction based off of the Fed's decision. However, it's not as simple as selling dollars upon rate cuts and buying dollars upon rate hikes. If it were, everyone would always make money.
This is why being a "news trader" can sometimes be nothing more than a toss of the coin over the long haul.
So therefore pros avoid trading news events.
Sean Hyman
Editor/Trader
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