Fundamental Case Study -Interest rate cut, boost of inflation.Fundamentals can be hard to trade and are almost always of no logical predictable direction. So how can we trade fundamental news and events?
This question can be answered in many ways. However, we want to put an accent now on high impact fundamental events that are impacting an economy in the longer term, and not daily data releases/news which create almost none volatility for our interest.
Each and every year there are few such events, some creating huge movements in one day/on the opening, others creating strong bullish/bearish trends in the longer term.
These events can be categorized in wars, attacks, pandemics, bankruptcy, federal banks drastic decisions, and more.
In this case study, we will analyze the FED's data releases due to the latest COVID-19 threats. On Tuesday, 03 March 2020 The FOMC cut the federal funds rate by 0.50% to a target range of 1.00% to 1.25% at an unscheduled emergency meeting.
This measure was taken due to the pandemic disturbance of the markets:
"The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity.
In light of these risks and in support of achieving its maximum employment and price stability goals, the Federal Open Market Committee decided today to lower the target range for the federal funds rate by 1/2 percentage point, to 1 to 1‑1/4 percent. The Committee is closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy ..." - Federal Reserve issues FOMC statement,
5:00 PM - Mar 3, 2020
What does this mean? And how can traders benefit from this fundamental impact factor?
The Federal Funds rate is the Interest rate at which depository institutions lend balances held at the Federal Reserve to other depository institutions overnight, and is scheduled 8 times per year. Usually cutting or increasing the interest rate happens over a longer period of time, by 25 basis points at once. These short term interest rates are the paramount factor in currency valuation - traders look at most other indicators merely to predict how rates will change in the future. By adjusting the right interest rates, with the purpose of economic growth, the FED keeps it's inflation targets through short periods of time.
Because the FOMC cut the federal funds rate, at an unscheduled emergency meeting by 50 basis points, it surprised the market and it reacted appropriately.
This means drastically devaluation of the US Dollar on the short term. And Market Makers acted accordingly, selling the US Dollar. We can see on the charts a few trades we took after the data releases.
In this case study, you can also see how it impacts the overall economy, creating movements on more instrument categories. GOLD, Currencies, yields, indices.
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