Trade Team Update - - 6/24/08 (FOMC)

Before we do a full breakdown of tomorrow's FOMC, lets first do a quick re-cap of today's market action...

The major fundamentals printed exactly as we forecasted yesterday in addition to the EUR/USD making a top right to the pip at my 1.5621 key upside level before falling back to the 1.5560 level after NY closed.

I would like to briefly re-cap the Consumer Confidence data -- it was abysmal. I forecasted a downside print but I honestly did not expect it to come in this low. It printed right near 50 which is dangerously low. It was the worst print in 16 years and it shows a very accurate representation of the U.S. consumer.

The consumer makes up a considerable chunk of GDP and GDP is a considerable factor in Fed monetary policy. I think it's quite possible today's abysmal consumer data might have taken some of the wind out of the Fed sails as far as being wildly over-the-top hawkish in their statement tomorrow.

On Sunday I told you to watch bonds and gold very closely... the bond market is now having second thoughts about how hawkish the Fed is going to be on rates. This is certainly something to take note of.

Gold has been tracking very closely with the euro this week as I indicated it would before the market even opened on Sunday. Reason being -- gold is tightly correlated to inflation and inflation-based monetary policy, as well as being tightly correlated to the movements of the USD.

FOMC:

Tomorrow's FOMC is going to be the most important event the market will go through so far this year. The results of tomorrow's FOMC, in my opinion, will set the EUR/USD on a short-term trend -- at least until the next ECB rate decision and Trichet press conference.

Throughout the week many traders asked me to offer my own personal probabilities for what may happen tomorrow and for me to lay out the possibilities. I am happy to do this.

But before we even get into that, I must talk about risk and money management. I am encouraging all traders to treat tomorrow's FOMC like an NFP. This means stay out... there are too many unknowns and too many possibilities for you to even think about trying to position yourself for what may or may not happen.

The risk is too high and most traders don't have the skills or the emotional strength to quickly navigate through the potentially volatile price action and wild price swings.

If you're usable margin heading into the FOMC is below 82%, I'd say you're in the danger zone and need to take immediate action to protect your account and protect your original account value. If you're in an overleveraged situation fix it now. You know what is at stake, so please be smart about it.

OK, the following FOMC commentary is based on my own analysis, my own opinions, my own probabilities, and my own view of the market. Traders asked for this, so I'm happy to oblige.

No rate cut/no rate hike: Over six weeks ago I told you the Fed was done cutting rates and this is my call for tomorrow as far as the rate decision is concerned. I'm currently running an 85% probability that the Fed will hold rates at 2.00% tomorrow (i.e. no hike, no cut).

My reasons for believing the Fed is going to hold rates is because the credit market is still on very shaky ground. The financial/money markets are under pressure and we've not seen all the light at the end of the tunnel in this regard. In addition, the housing market has yet to find a bottom and a rate hike at this point would send the housing market to their worst levels ever.

Next, I look at the equities market. The equities market thrives on low rates and cheap money. We know the Fed has a special place in their heart for Wall St. and I don't believe they are going to do anything to shake up Wall St. tomorrow.

Next, I look at growth, the current account, and the trade balance. All three of those fundamental sectors remain very weak to the downside. Rate hikes would put a stranglehold on growth. Rate hikes would strengthen the USD which would put our already attrocious current account and trade balance under more downside pressure.

Next, I look at the jobs market. Rate hikes make the cost of money and credit more expensive. The U.S. jobs market is still considerably weak to the downside. The employment sector has been bleeding jobs all year long and initial claims have been steadily rising. A rate hike would put the employment sector under further downside pressure and I don't see the Fed doing this yet.

25bps raise: My current probabilities show a 10% chance of a 25bps rate hike tomorrow. The only reason Bernanke would raise rates tomorrow would be to send a message to the world markets that the Fed is serious about saving the USD, serious about inflation pressures, and to slow down the commodities market.

As a taxpaying American citizen it's my opinion that a rate hike would be the greatest thing ever. In fact it's imperative the Fed starts raising rates. It won't happen tomorrow but I truly hope it happens before the end of this year. I'm seeing too many friends and family suffer under the crushing weight of inflation. I'm seeing hardworking folks lose businesses and lose their dreams of entrepenurship. This ought not to be happening in America.

But, this is exactly what happens when you have an illegally formed and unconstitutionally operating central bank that is manipulating and price fixing markets.

25bps cut: My current probabilities only show a 5% chance of seeing a 25bps cut tomorrow. The Fed is under too much pressure to save the dollar and cool commodities to cut rates any more. The fact that they've acknowledged the inflation issue was a sure fire signal that rate cuts are off the table until further notice.

Those are my current probabilties based on current market conditions and on my own fundamental research of tomorrow's FOMC. I don't anticipate making any changes unless of course I see something in the market, otherwise, this is my thought process heading into the FOMC.

EUR/USD:

Should the Fed hold rates at 2.00%, the actual rate decision will take a backseat to the FOMC statement. If the market doesn't get an upside or downside shock with the rate policy, all eyes and all attention and all focus will be on the FOMC statement.

It is within the FOMC statement that the potential volatility lies and the potential for wild and chaotic price swings lie. The statement is the key to where the market is going to take the EUR/USD in the near-term.

I cannot predict what the FOMC statement will say. I can't and won't speculate on this. I can make the case for the Fed being dovish in their statement as easily as I can make the case for the Fed being wildly hawkish in their statement.

But I will say this -- it is my opinion that the risk that lies within the FOMC statement is on the EUR and not on the USD.

A few weeks ago Bernanke made one hint at raising rates and the euro lost 500 points the dollar. That's a 500 point move based on one comment during a speech.

I do believe the Fed talks about inflation in the statement. What I don't know and can't predict is how strong the rhetoric is going to be -- and this is the real risk for the euro tomorrow.

Should the FOMC statement place special and strong focus on rising inflation and if the statement gives any kind of signal for an upcoming Fed rate hike it is my opinion that the EUR/USD will make a rather sharp downside correction. This could mean a move to the 1.5200 level in the short-term.

On the flip-side, should the FOMC not give special attention to the inflation issue and if it fails to give any signal to the markets that the Fed is considering a rate hike, all bets are off for the dollar and we should see the market attempt to move the EUR/USD back to the 1.5750-1.5800 level in the short-term.

The other factor to consider is how the actual rate decision vote comes out. If all FOMC members vote for either a no-cut or a few vote for a cut this will not be much of a confidence boost for the USD. If a few members vote for a hike, this will likely be perceived as a signal of coming rate hikes and would be very positive for the USD.

Trading:

I'll warn you again -- stay out until at least after he FOMC and the dust settles. Don't trade anymore between now and then. Protect your margin. Protect your principle. Protect your money. Be smart, don't be an idiot. You can't fight this market, you can't fight the banks, you can't fight the brokers, you can fight the stop hunting and stoploss triggering that will go down the next 24+ hours.

For now my trade plan is to keep shorting the euro on the rises. I'm still overall bearish on the euro. Tomorrow's FOMC could alter my near-term gameplan but for now it's remaining the same.

Now don't be surprised to see some movement in later Asia and early European session. There could be more positioning and squaring that goes on as the market continues to prep for the FOMC.

Last warning -- sit on the sidelines and watch the chaos. Don't be an idiot and don't try to be a cowboy. You could pay dearly for being an undisciplined risk manager.