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While last week certainly had its share of risk events that helped move currencies, the major theme in currency trading was continued weakening/consolidation for the U.S. dollar.
This week, the weakening will be a key focus for us. We have some very weighty top-tier data events occurring in the next few days.
The key event on the economic calendar is the Federal Open Market Committee (FOMC) meeting and rate announcement today (Wednesday). No one is considering there will be an actual rate change, but what traders and speculators are looking for is the U.S. Federal Reserve comments related to the much dreaded taper of economic stimulus.
This presents an opportunity for profits from currency trading...
Currency Trading on the Fed
When the Fed first discussed tapering quantitative easing in June of this year, it sent markets into a tailspin.
From June 18 to June 24, the S&P dropped its biggest consecutive-day loss on the year, from 1,651 to 1,573.
At that point Ben Bernanke came out to reassure the markets that all was well, and there was no need to worry. The S&P happily resumed its record-setting climb.
There were rumors that the Fed could announce a taper in September, although we knew that was highly unlikely... If indeed the Fed was going to be data dependent on their decision (as opposed to simply following a timing schedule), there was no way that the economy was ripe for any kind of stimulus reduction as the fall quarter began.
And as expected, such was the case, there was no taper and the U.S. dollar sold off, as you can see in this 4H Chart of the EUR/USD. The red vertical line represents the start of the week when the FOMC met. We had a gap open on Sunday, and the real move began on Wednesday.
It has continued unabated, as the euro has beaten the stuffing out of the dollar over the last month with a move up of 350 pips.
Currency Trading Ahead of the Fed
Here's what you should understand about currency trading on Fed meetings...
The QE taper won't be any time soon.
The U.S. economy data has failed to improve substantially - or consistently; we now have shutdown-related losses that aren't known, and September's nonfarm payroll report was abysmally poorer than forecast. Currently, Bloomberg economists seem to have their eyes set on a taper beginning March 2014.
However, we don't need an actual QE taper, as the market is inclined to price in certain volatile actions in advance.
So we have to begin thinking in terms of expectations for that event and not simply wait for its
arrival to see what may happen.
So as we look to the Fed speak out of this week's meeting, we are looking to see if there is any reason to consider a March date for the timing of the taper beginning. Such an acknowledgment will likely send the market reeling again.
This is what that would mean for currency trading: