Trade Team Update

Now that we finally have the FOMC behind us and we got our forecasted 25bps cut, it's time to look forward to the possibilities in the near-term...

Lets first break this down by looking at the interest rate gap:

Obviously we have an even wider interest rate differential between the EUR and USD -- a full 200bps in favor of the EUR. Will this be a factor? Yes, of course, but not to a dramatic degree in my opinion.

If the ECB was not firmly in a rate hold cycle and possibly headed towards a rate cut cycle I think the interest rate differential would factor in to a greater degree, but with Eurozone fundamentals weakening and the ECB shifting monetary policy around I do not see the wider differential putting the USD under an intense amount of pressure vs. the EUR.

FOMC statement:

It's amazing... the Fed spends two days meeting and that statement is the best they can possibly come up with? It literally said nothing about anything -- it was vague, ambiguous, mindless, and basically void of any verbage the markets can take and run with.

No matter, this is what we got and what we have to work with... so, lets dissect this piece of garbage...

Recent information indicates that economic activity remains weak. Household and business spending has been subdued and labor markets have softened further. Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters.

No crap? We hadn't noticed...

Here's one of my favorite parts:

Although readings on core inflation have improved somewhat, energy and other commodity prices have increased, and some indicators of inflation expectations have risen in recent months.

Not too long ago we didn't have an inflation issue according to Fed data, but now we have indicators of inflation pressures?

And then the statement goes on to say:

The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization.

Well that's fantastic but what about the inflation and price pressures that have been persistant the past 12+ months as oil and soft commodities have gone through the roof? Does the Fed really think those costs have just been absorbed or have evaporated into thin air?

They cap-off the inflation rhetoric with this gem:

Still, uncertainty about the inflation outlook remains high.

Now, a few lines before that one the Fed told us they expect inflation to level-off. And there they tell us the inflation outlook remains high. So, which is it? Do they see it moderating or is there an elevated outlook on inflation?

Are you seeing a pattern here? Are you seeing how the Fed talks out of both sides of their mouth and yet says nothing?

This kind of inflation rhetoric would be like me telling you it's not hot outside, but I think the warm weather will cool off soon... where is the sense in this kind of rhetoric? Bernanke and the Fed should be institutionalized in a psych ward for even thinking to put out this kind of worthless trash.

Their parting words:

The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability.

So, what are they saying about rates? I believe they are saying another cut is on the table and the door is open. Do I think they cut again at the next meeting? No, I'm not convinced this will happen. I'm not expecting any more cuts at this point.

There were two dissenting votes this go around. Two FOMC members wanted to hold rates steady. Last time there was only one dissenting vote... I like the fact there are two dissenters now as that means there could be even more next time.

EUR/USD:

Although the decision and statement have only been out a few hours I'm hearing all kinds of different theories and predictions for what the EUR/USD will do next. Some are saying we go back to 1.6000++ and some are saying we move below the 1.5000 level.

I'm not making any predictions or calls at this point. Tokyo isn't even opened yet for goodness sakes...

My EUR/USD bias remains neutral. What does a neutral bias mean and how does it reflect in my trading? It means I am not adding new trades on a swing basis. It means I can freely take euro longs and euro shorts purely on an intraday basis. It means I will play the ranges looking for 20-50 pips per trade, taking my profits, and getting out.

I have to allow the markets and the banks to digest this rate cut and the FOMC statement. And for sure I at least have to see how Frankfurt and London initially react to this.

For me it's all about staying patient and methodical right now. I'm not trying to hit a grandslam with my trades but rather depending on price action and simply allowing the market to show me where they want to take things next.

If you were expecting some monumental update that tells you to either "go long" or "go short" sorry, that's not what you're getting today... it's not that easy or cut-and-dry... the market doesn't work like that.

I'm still more inclinded to short the euro rises at this point and will be slightly more cautious to add new euro longs at least until I get a better idea and feel for how the market wants to be played post-FOMC.

When will I get a better idea? I need to see how NFP plays out as that's our next piece of critical data. Based on what I'm hearing from the Fed, NFP should not be too pretty but that doesn't mean the USD gets pounded...

I do not expect us to see a breakout in either direction before Friday's NFP. There's now a higher probability to move back up towards the 1.5700 level based on the Fed's actions, but again, lets at least wait to see how London handles this Fed business...

Tomorrow:

Tomorrow is May day in Europe, so some market players will be out and we'll have some thinner market conditions. We do get critical manufacturing, consumer and inflation data in the form of PCE, Personal Spending, and ISM.

PCE is very key as the Fed looks closely at this data to determine rate policy. PCE should print USD+ if we get some truth. Personal Spending should be USD- and ISM could surprise to the upside I believe.

All of tomorrow's data is critical for future rate policy, in fact. So I think we'll get some better indicators as to the Fed's next moves based on how tomorrow's data prints.

And don't forget, next Thursday we get the ECB rate decision and Trichet press conference...

My best advice is to do your own research and analysis of the market... read the FOMC statement for yourself and come up with your own gameplan. I'm in a more neutral, wait-and-see mode and will trade accordingly. You need to trade according to your own risk management plan and to how you are projecting the market.

If you don't see a trade, don't take it. Don't force trades. Wait for your price and for your entry. And if you have to, sit on the sidelines for another 24-hours until you get more clarity. Being flat or close to flat during a time of shifting fundamentals and interest rate policies is always a good thing...