The big day is finally here: within a few hours, we will all know whether the Federal Reserve is raising interest rates this month of September. It has been the major topic of fundamental debate in the Forex market for quite some time now.
The market’s consensus is that there will be no rate hike today. Although there was an interesting story in Bloomberg saying that some of the Fed’s major dealers appeared to be positioning themselves for a surprise rate hike, with just a few hours to go opinion seems to be shifting even more in favour of no rate hike, with Bloomberg giving odds of about 2/1 for such an eventuality.
The major reason it is such an important question for the market is that America is seen as the strongest major economy in the world right now, and as such, traders are prepared to buy into the U.S. Dollar. For longer than one year the U.S. Dollar has been choppy against most currencies, so traders are waiting for a trend to emerge. The endless will-they-won’t-they debate over the rate hike and mixed economic data releases which vary from month to month keeps the USD choppy.
One thing that might help your trading if you like to trade based on economic releases, is to consider “which side is the bigger surprise”. The bigger surprise here would be a rate hike. This suggests that if there is a hike, the USD will rise by proportionately more than it will fall if there is no hike. Another thing you can consider is how new data releases such as this one tend to boost prevailing trends when they support the trend. That doesn’t really apply here as the USD is not in much of a trend right now – well, maybe a small bullish trend, which would also suggest that a hike would produce the bigger move.
Successful trading is more about spotting where the potentially big payoffs lie, than about being right. If you are right half the time but triple your money when you are right, well, you will be doing absolutely fine.
As for Japan, the Bank of Japan released their monthly report earlier and pulled a lot of complicated monetary manoeuvers that I won’t pretend to fully understand. The result was that the Yen weakened, and then later began to strengthen. The persistent strength of the Japanese Yen doesn’t make a lot of sense vis-a-vis the Japanese economy. The Bank of Japan is trying hard to cause inflation and seems prepared to keep injecting new money into the system endlessly, yet the Yen gets stronger.
When technical analysis and fundamental analysis are completely out of sync like this, I say go with what the charts are saying. If people are persistently buying Yen, it doesn’t necessarily matter why, unless there is some factor that can flip very quickly and cause a huge reversal in the blink of an eye.
Now it is over to you Ms. Yellen….