Will There Be a Forex Trading Surprise This Week?

Will There Be a Forex Trading Surprise This Week?

As any trader knows, it is the reaction to news (e.g. economic reports, monetary policy decisions that counts. This is where the saying Buy the rumor, sell the fact comes from. It also reminds me of the old trading adage, It is the reaction to news, more than the news itself that matters.

As anyone trading also knows, markets move when there is a surprise in a news event vs. the consensus forecast.  In the current week, there is a full calendar where the focus will be on central bank monetary decisions from the Fed, Bank of England and Bank of Japan.

So, let’s take a look at what might produce a surprise.

FOMC ANNOUNCEMENT (WEDNESDAY)

A major surprise would be no cut in rates but the chance of this happening is essentially zero. So, the question is what would be a greater surprise, a 25 or 50bps rate cut?

Coming into the week it was seen as a tossup with expectations split 50/50 between a 25 and 50bps interest rate reduction. However, those odds have shifted to start this week with money market pricing for a 50bps rate cut rising to 67%.

What had been seen as a close call has shifted so the surprise would now be if the Fed cuts by only 25bps.

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BANK OF ENGLAND ANNOUNCEMENT (THURSDAY): After cutting rates in August, expectations are for the MPC to maintain the Base Rate at 5.0%. 65/65 economists surveyed by Reuters look for an unchanged rate with markets assigning a circa 77% chance of such an outcome. The vote split is expected to be 7-2 with dovish dissent expected from Dhingra and most likely Ramsden… Newsuqawk.com Week Ahead Highlights

So, the major surprise would be a cut in interest rates. A lesser but not insignificant surprise would be if there is a narrower vote split, which would raise the chance of future rate cuts.

BANK OF JAPAN ANNOUNCEMENT (FRIDAY): The BoJ will likely refrain from conducting any policy adjustments with money markets pricing around a 94% chance the central bank will keep its short-term interest rate at the current level of 0.25%, while a recent Reuters poll showed economists were unanimous in their calls for no rate hike at next week’s meeting (Newsquawk.com).

With no change in rates widely expected, the only chance for a surprise would be in the press conference (assuming one follows the meeting). Given the recent strength of the JPY, monetary policy officials will like to try and avoid any surprises.

So, in the week ahead, the greatest risk for a surprise would be from the FOMC given rising expectations for a larger 50bps rate cut. See Will the Fed Cut Rates by 25 or 50bps?

Will There Be a Forex Trading Surprise This Week?

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