FED Chair Bernanke’s “taper” Announcement’s Influence on Forex Market

U.S. Federal Reserve Chairman Ben Bernanke/New York Times
U.S. Federal Reserve Chairman Ben Bernanke/New York Times
Forex Traders can use Treasuries to identify directional biases in the market. Undoubtedly, the U.S. 10 Year Treasury will be affected by any actions of the FED. Assuredly, the same will be true on Wednesday September 18, 2013 when Federal Reserve Chairman, Ben Bernanke, is expected to announce exactly how much the FED plans to taper from it’s monthly “buy back” of Mortgage Backed Securities.

Currently, the FED purchases $85 billion dollars in MBSs every month. The majority of economists predict the figure will be $20 billion while others, expect a smaller cut of $10 billion. The economic data has been ambiguous lately. Some analysts insist the data has even been soft to say the least.

So, expect the FED to be cautious in their initial tapering maneuver, which could be as low as the $5 billion dollars as the utmost pessimists suggest. What is complicated and problematic for the FED is its goal was 6.5% unemployment. Considering the current rate is 7.3% and the participation rate is at a 35 year low, how does the FED justify both its forecast and its imminent taper simultaneously? Whatever the case may be, the world will know around 2 PM EST today.

Wall Street Journal Chart of 10 Year Treasury Yields
Wall Street Journal 10 Year Treasury

Most definitely, investors, traders and financial institutions across the globe are sitting on the edge of their seats anticipating what “Big Ben” will say this time. ATTENTION: Fundamentally, the FED’s intervention does not affect the FX Trader. However, the FED’s actions can definitely influence expectations and in turn indirectly affect the market. So what does the impending FED taper mean to the Forex Trader?

For one, many of the set ups we see forming in the dollar based pairs are sure to deconstruct when the FED announces its imminent taper. As a result, investors will be running for the hills in search of safety in the welcoming arms of the USD. We should all be familiar with this bond dynamic. In a risk off climate, investors will most likely purchase bonds.

Therefore, FX Traders will see massive USD strength during risk off climates because U.S. dollars are purchased in order to buy the bonds. Here below, you can see the FED’s influence on the 10 Year Treasury from September 15, 2008 to September 13, 2013 detailed in the Wall Street Journal’s chart. Prices have risen 5 days in a row and the yield sits at 2.85%.

It should also be noted that since last year’s low, the 10 Year Treasury has risen 118%. REFERENCE CHART ABOVE. Keeping this in mind, the USD and the 10 Year Treasury could both experience a significant retracement and FX traders must understand how the market’s expectations of the “taper” will affect the USD.

EUR/USD September 17, 2013
EUR/USD September 17, 2013

In the EUR/USD pair, there was a weekend gap that appeared Monday, but as expected, a steady pull back erased that. The red arrow points out the consolidation and anticipation for Wednesday’s announcement. There appears to be some support at 1.3323 and the upside looks clear but resistance should be felt before 1.34 at about 1.3385. On the downside, obviously our sell level will be at 1.325. If the FED tapers more than $10 billion, then expect the USD to be bullish. All points are illustrated in the EUR/USD chart above.

For assurance, we can look at the dollar index. There is a gap to be filled and level set before the gap must be breached before the USD looks strong enough to bounce. The 81.00 resistance was broken by a relatively strong candle indicated by horizontal arrow in center but 81.75 must be broken to be sure. Hopefully, this info will better prepare traders for Wednesday’s announcement so you can capitalize off of these set ups.

Dollar Index September 17, 2013
Dollar Index September 17, 2013


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