Research Note: October FOMC Meeting

On Wednesday, October 24th at 14:15ET/18:15GMT, the FOMC will conclude their 2-day meeting and we do not anticipate any major changes to monetary policy. This is sensible considering the Fed’s newly announced stimulative measures, commonly referred to as QE3, at their September meeting whereby they agreed to purchase an additional $40B per month of Mortgage-backed securities (MBS) with an open-ended timeframe, which comes on the back of their ongoing purchases of treasuries through the end of the year.

Together, this will increase the FOMC’s holdings of securities by around $85B per month through 2012. This pause may give the FOMC time to delve into their current actions and allow them to fine-tune changes to their communications strategy; as we have seen from recent Fed speeches, on their views of when the timing of the first rate hike should be based. For example, Fed President Evans has suggested that the Fed should provide support until the unemployment rate falls below 7%, as long as inflations remains below 3%.

Since we do not feel the FOMC has reached a consensus on this front, it could mean that trivial alterations to the FOMC statement will likely be the only fireworks witnessed at this meeting. We anticipate this to be centered on the slight improvement in the U.S. economy and potentially even mention a bit more on inflation considering the recent run-up of CPI.

That being said, this doesn’t mean that the FOMC is done, as we suspect they could take further stimulative measures at their December or possibly even January meeting – since the Maturity Extension Program (MEP), or to some better known as “Operation Twist,” is set to expire at the end of December.

As a reminder, all FOMC meetings are now two day meetings (after a change announced earlier in the year), however this meeting will not be associated with a summary of Economic Projections, nor a press conference by Chairman Bernanke. This in itself is a hint that the fed is unlikely to take action since Bernanke cannot explain the committee’s rationale to further measures. Furthermore, with the meeting’s close proximity to the U.S. elections in November, we feel additional action runs the risk of politicizing the Fed.

Market Strategy: Our primary scenario is for the Fed to remain on the sidelines and we think this could elicit a further correction lower in most risk assets and thus send the U.S. dollar higher – The past 24 hours has seen the S&P500 break the key 1422/26 level (prior 2012 highs as well as the 23.6% retracement of the rally from the June lows), US Oil (WTI) broke below the August and October lows between $87-88 and the 10-year Treasury yield continues to get rebuffed by the 200-day sma near 1.80%.

If this were to continue, our preference would be to fade remaining strength in AUD/USD towards 1.0300-65, which sees the convergence of not only the 55, 100 and 200-day sma’s, but also the 21, 55 and 100-week sma’s as well as the bottom of the daily Ichimoku Cloud, in search of a correction towards the prior lows near 1.0150 and potentially even test parity thereafter.

Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Forex and other leveraged trading involves significant risk of loss and is not suitable for all investors. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that FOREX.com is not rendering investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. FOREX.com is regulated by the Commodity Futures Trading Commission (CFTC) in the US, by the Financial Services Authority (FSA) in the UK, the Investment Industry Regulatory Organization of Canada (IIROC), the Australian Securities and Investment Commission (ASIC) in Australia, and the Financial Services Agency (FSA) in Japan.