Among several fundamental factors that have a big impact not only on the forex market, is one that I dare not ignore, one that you should keep a close eye on eight times (Sometimes more. In 2010, the FOMC met ten times) a year if you want your ROI to be something to write home about. Ladies and gentlemen, the Federal Open Market Committee (FOMC) Meeting.
Just like the Non-farm Payroll (NFP), the Federal Open Market Committee meeting minutes are a big influencer not only in the forex market, they affect a whole range of assets (stocks, bonds, houses, etc) including the value of the US Dollar itself.
what is the federal open market committee?
The FOMC is the arm of the Federal Reserve board that controls monetary policy. Monetary Policy here, refers to the actions undertaken by a central bank, such as the Federal Reserve, to influence the availability and cost of money and credit to help promote national economic goals. It is the FOMC which makes key decisions about interest rates and the growth of the United States money supply. That’s it! Nothing more, nothing less. It’s made up of twelve members; seven members of the Federal Reserve Board and five presidents of the Federal Reserve Bank. These twelve guys combined make decisions that, whatever the outcome, you need to follow before you place an order to trade. If you keep an open ear to what they decide, you’ll just make money in the foreign exchange market, no doubt about that. Read on and I’ll show you how.
what is the role of the federal open market committee?
So what does the federal open market committee do? The answer is actually quite simple. They set interest rates and/or discount rates (on the US Dollar, a trading instrument) by deciding whether to increase or decrease money supply to the banks. How is this done? Let’s assume the FOMC wants to reduce interest rates. First, the FOMC informs the banks that it wants to buy U.S. Treasuries, the transaction is made and the banks are paid in US Dollars, when this is done, the banks now have extra physical cash in hand which they can lend out to clients/customers. Now, because the supply of cash is now higher, the banks encourage clients to borrow money by reducing interest rates and voila! Interests rates reduced. The opposite is true if the FOMC intends to decrease interest rates.
how it affects foreign exchange
The FOMC doesn’t just make decisions, their decisions are based on a lot of other factors that affect national economic growth such as unemployment rate, GDP, etc. When the FOMC reaches a consensus in comparison with the previous meeting’s decision, we as traders can tell whether to sell or buy the US Dollar (as base currency) to get some profits. My recent trades on FOMC decisions fetched me about $6,000 (February 2015) and that’s reason enough for you to follow it too. When these guys increase the interest rates, you’d want to be selling, when they decrease it, you’d want to be buying as much as you can (but by keeping greed under control and always setting TPs and SLs).
Below is the effect of the release of the FOMC minutes and how they affected the USD/JPY and EUR/USD pairs in February 2015.
The USD/JPY pair is what fetched me the most money. The red dashed lines are my sell points (open and close) and the green line is my buy point. All profiting.
And here the corresponding effect on the EUR/USD pair.
After seeing this, if you don’t trade fundamentals or at least don’t follow the FOMC statements, then I’m very sorry to say that you’re slacking. I encourage not only to keep an eye on all fundamental news but by also taking time to learn how they affect foreign exchange and also mastering the “art” of knowing when and how to enter/exit trades around these times.
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