Can we consider today to be the beginning of the end of the Quantitative Easing program? Well looking backward to the economic data we could see some reasons for Fed ti start tapering from today, after the FOMC meeting. But even if we were to be sure of a tapering it wouldn’t be enough to know for sure the direction market will take.
The markets are waiting for a good reason to take a certain direction. The expectations for today are for the Fed to:
- Take no action. Fed could not start the QE tapering nor say nothing about a certain date when it will happen. This could trigger high volatility and the market could become bearish on the US dollar.
- Not start tapering, but announce a certain date when they will and turn to a hawkish tone. This could have a higher impact on the market and the dollar could spike.
- Start tapering the QE with less than 10B a month. This action is pretty expected by the market, so it might not have a very big impact, but on short term the US dollar might gain.
- Start tapering heavily with more than 10B. This would be a big surprise and the volatility might get through the sky. The dollar could rally from the first seconds to the end of this week.
These are the market expectations as for now.
17 of the main commercial banks (Citi, BNP, Barclays, Goldman, Nomura, Credit Suisse, DBank, JPM, BOFAML, RBS and Soc Gen are only a bunch of them) have announced their expectations for today’s meeting.
Two of these are expecting a tapering starring from today, six are betting on a January tapering, three of them are going for March and the rest are holding back. So from what we see the higher probability remains somewhere around the middle. There are equal chances for starting the tapering with less than 10B or no taper but some details regarding when it will start.
For the technical point of view we are looking at the most traded currency pair in the Forex market, EURUSD. Its price has consolidated in a symmetrical triangle right under 1.3800 and above the up channel trend line. If we stick to probabilities we would then think that is better to get with the bulls and wait for an upside breakout, followed by a rally above 1.3820 (latest high).
On the other hand the sceptics would say that a surprise could get the dollar back on its feet and 1.3700 support will be broken and a drop wouldn’t be stopped until 1.3600.
We are telling you to play it safe. If you would like to have a higher probability for your trade wait for the FOMC meeting, see where the market is heading and take action. If you would like to take a risk, then take it smart. Our favorite play for this event would be a Long Outside European Option, especially on the FX market.
Set a range of 1.5 or 2x the daily average of the FX (this way you will have a pretty nice risk reward for you option) and an expiry date for tomorrow, this way you will keep your premium as low as possible and get a pretty nice payout. For an example we took a Long Outside E.O. for the EURUSD with the Trigger Price 1 at 1.3820 and the Trigger Price 2 at 1.3680. Outside this range we will have a payout 5 times higher than the Premium we paid. If the price will remain inside the range, our risk is limited to the amount we already paid.