The Fed decision today plus the press conference is going to rule the roost for the day

Euro chart

The euro surpassed the 100% retracement level yesterday and is now retreating a bit, as is customary. Note that it is overbought. Bloomberg points out it’s at the lowest since 1022. The question is how far it will go. If the cut turns out to be the standard 25 bp and we get no forward guidance, the most-expected outcome, the euro will ping-pong around, sell-on-the-news, and by Friday be back on the rise.

If the decision is another jumbo 50 bp cut and there is any guidance suggesting more to come, the sell-on-the-news effect will be small and short-lived.

Never mind that in the end, Trump will get his way to some extent and the Fed will cut by a lot more than a one-time 25 bp, in our humble opinion. But that’s for later, not today.

Some foolish people like to try to game the market on Fed meeting days with minute-to-minute trading, but we have never seen a track record of results. That suggests it’s just a silly game for people with too much time on their hands.

We admit it would be nice to see a blow-by-blow (not too detailed) of the sequence of price events after an announcement like today’s. but there are several reasons to doubt it would be useful. First, the last time (Sept 2024) it was a 50 bp unexpected “jumbo” cut, so if that’s what we get later today, will the FX prices repeat?

See the chart insert with blue vertical line at the Sept 18 Fed rate cut. The euro rose a bit more but then crashed. That had nothing to do with the Fed but rather with the ECB expected to cut and then doing it—and not only cutting, but cutting six times. The deposit rate went from 3.50% on Sept 18 to 2.0% today.  This time the ECB is expected to stand firm at the existing level. 

Conditions are never the same. You can’t use past stand-alone central bank decisions to predict upcoming price events because the decision outcome is not stand-alone. Everything is relative to other central banks, relative growth, relative inflation, confidence in government (think Liz Truss and Trump), and hundreds of other factors.

Second, to try to figure out what the market is thinking by blow-by-blow trades is like trying to see microbes with a magnifying glass instead of a microscope. You can never know what positions the big players started with or how they develop over time, plus there is that random event effect, even on a day when you might think every trade must be purposeful. Finally, we have dozens of AI’s all over the world built on different indicators with different triggers. Remember, the dollar is already oversold.

If anyone does try to play in this sandbox, please send the results to us!

Outlook

The Fed decision today at 2 pm plus the press conference is going to rule the roost for the day.

Ahead of time, yesterday the Atlanta Fed released its latest GDPNow—at a whopping 3.4%, up from 3.1% on Sept 10. Both real consumption and investment rose higher (even if exports contributed less). We get another one today. The probability of recession continues to recede.

As noted above, the retail spending data encouraged the view that the economy is just fine, thank you. This is being questioned by sane people digging into the data, but never mind—the effect has been delivered. See the cute chart from Reuters.

Then there’s the quite good response to the 20-year note re-opening. Reuters reports it was a factor in sending the 30-year to a 4.5 month low at 4.62%.

Forecast

As noted above in the euro chart section, if we get the standard 25 bp rate cut today and no guidance, first is the sell-on-the-news effect, then some zigzagging around, then a resurgent euro. If it’s a jumbo cut, the sell-on-the-news effect will be cut short.

But that’s a guess.

For over 30 years we have said in this report “do not trade on Fed decision day.” The probability of getting it right is too low. We deliver entries, stops, etc. in the Trader Advisories, because readers pay us to, but we’d really prefer to put NPR (no position recommended) in every Excel cell. The worst risk is that even if the entry is okay, the market zooms right through your stop and proceeds to deliver a re-entry, another stop, and a whole series of in-outs that wrecks your nerves and your track record. It’s only one day. You can sit it out. 

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This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes.

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