Forex Investment and Currency Trading

The next instalment of the Federal Open Market Committee (FOMC) interest rate decision will be delivered on August 12. However, as has been the case in the past, with the Fed explicitly committing itself to keeping interest rates “exceptionally low” for an extended period of time, the actual interest rate announcement is unlikely to attract much attention. Instead, the focus will undoubtedly be on the tone and content of the statement. In terms of the economic and inflation outlook, analysts expect the economic assessment to perhaps offer some acknowledgement of the improvement in the economic outlook, and maybe note that the economy may be stabilising, despite the continued weakness in the labour market. The inflation outlook is likely to remain virtually intact. In terms of the Fed’s monetary policy stance, this meeting is likely to be pivotal for the FOMC, as the Fed will likely decide on whether to increase the size of its Treasury purchase program given that the allocated funds for the program will likely be exhausted before the next meeting. 
 
Foreign Exchange: The biggest issue for the currency markets is whether the Fed pulls a surprise like the Bank of England last week and unexpectedly pumps up its asset purchases. However, that’s unlikely to be the case as the Fed has some ways to go with its Treasury purchases, and has an even longer way to go when factoring in its total asset purchase plans, so there’s no need at this point to make any changes. The second issue will be the tone of the statement, which should be a little more positive than that last as we’ve seen further improvement (or at least less deterioration) in the weeks since the last FOMC meeting. But with unchanged asset purchases being USD-supportive and a more optimistic tone being USD-negative (assuming the risk-on/USD-negative relationship continues to hold), there may not be much net USD reaction. 
 
Fixed Income: The Fed rate decision should trump all other economic releases tomorrow, and one continues to highlight the risk of a bond bearish outcome.  This is motivated by several factors.  First, the bond market has sold off after the prior two Fed decisions.  Second, it’s expected that the economic and credit assessment to be notably improved.  Third, the Treasury purchase plan is unlikely to be extended despite recent Bank of England precedent to the contrary, and based upon the fumbling of an announcement today, there is at least a slim chance that the Treasury purchase plan could be halted altogether effective tomorrow (this is highly speculative, but worth noting since it would prompt a sharp bond selloff) The only thing tempering this view is that no exit strategy should be offered given that it has already been discussed ad nauseum in other forums.  Still, the overall assessment is that Treasuries should sell off in response to this report.