FED FOMC Preview

By IBTimes Staff Reporter | January 27 2010 5:35 AM

Will they or won't they raise rates is the question. Well, actually, it's not much of a question, as there is nearly no chance of a rate hike today, especially with Inflation numbers remaining tame, and bond yields trading lower since the start of 2010. The main item, as it has been for nearly a year is the RHETORIC. The FED has been pretty consistent in using their accommodating language, and their have been very few hints towards any immediate rate hikes. Nonetheless, Forex traders have consistently been expecting a slight hawkish stance as economic fundamentals, especially the US employment markets, have been improving.

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Personally, I believe the FED punts until the next meeting, and uses the most recent Non Farm Payrolls numbers, which were worse than expected, as proof that the economy is improving, but there is no reason to hurry up the exit strategy. Also, with yesterdays UK Preliminary GDP being worse than consensus, it appears that economists have been too quick to revise their expectations higher.

FOMC aside, today's expected volatility should create numerous trading opportunities. I am going to concentrate on three; namely the EURUSD, GBPUSD, and GOLD.

The EURUSD continues to look weak. There was a slight bounce on Monday, but its inability to trade above 1.4200 shows that there is a lot of selling pressure in the pair. As we are currently at around 1.4070, last week's lows of 1.4030 are definitely in play. If we break below 1.4030, there is a strong chance that sell stops will bring the pair down to the 1.4000 level. If that occurs, before the FOMC meeting, than I believe the 1.4000 support level will hold, and could be an area for a possible short term buy entry. Nonetheless, I would use a tight stop, and would exit any short term trade before the FOMC release at 19:15 GMT. The other set up, would be to short the pair if it traded below 1.4390, as long term trends appear negative.

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Looking at the GBPUSD, the pair was lower yesterday following weak UK GDP numbers. As the chart shows, it has support around last week's lows of 1.6075, however, if that area is breached, it could drop back down towards 1.6000. Nonetheless, it has been trading in a range this week, so today's UK economic releases, could easily cause it to trade back up to the 1.6250 level.

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Looking at Gold, I was actually quite surprised that it held up as well as it did yesterday, even with China announcing it will require more banks to hold higher cash reserves for their loans, and thus limit China's economic expansion. Nonetheless, I continue to believe that if the 1075 level is breached, there is little holding back the metal from trading down to the 1050 level. However, yesterday's strength shows that there could still be another bounce left. Therefore, if Gold trades above 1105, today's expected volatility could cause it to rally back towards the 1130 range.

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To conclude, I don't believe the FED will announce anything earth shattering at their FOMC meeting, but I do expect to see lots of volatility in the markets today. One wild card though is Ben Bernanke. With his reelection taking place in four days, it is possible that the FED may use today's FOMC announcement to foretell some future moves the FED may take, to boost confidence if their embattled leader.