One of the fundamental factors that can affect the value of currencies and market movements is the FOMC. Why can the FOMC affect market movements, currency values, and forex trading?

Actually, what is the FOMC?

FOMC stands for Federal Open Market Committee which is the policy meeting board of the United States central bank. Policies produced by the FOMC tend to have a global impact and will usually always be preceded by rumors and often shake the market even before the publication of the FOMC announcement. Well, for forex traders who prefer to trade using fundamental analysis, the FOMC decision announcement will definitely be a must-follow. So, how can the FOMC be a trigger for market movements? Structurally, the Federal Open Market Committee is a committee consisting of high-ranking officials of the United States central bank, often referred to as the Federal Reserve or The Fed. The FOMC holds regular meetings or FOMC meetings to determine changes to US monetary policy, including interest rates, monetary stimulus, bond purchase programs, and so on.  The decisions announced after the FOMC meeting are only valid in the United States. Therefore, the impact of the Federal Open Market Committee meeting can affect the strength and weakness of the US dollar exchange rate, the rise and fall of stocks on the US stock exchange, bond yields, and so on. Well, on the other hand, the large role of the US dollar as an international currency will give rise to a domino effect that can extend to the whole world. The impact of the Federal Open Market Committee's decision can appear almost spontaneously or have an impact on long-term monetary policy.  Traders who are aware of the new policy can immediately buy or sell in the forex market, because the effect is so large, so prices in the financial markets, including forex and stocks, usually move strongly after the decision is announced.

Indeed, when is the FOMC meeting held?

FOMC meetings are usually held eight times a year, the meeting schedule will be released at the beginning of the year. Traders can view the FOMC meeting schedule on the Federal Reserve's website. However, as a measure of anticipation or following speculation, traders can look at the economic calendar. This regular meeting will discuss economic and financial conditions during the current period and decide to raise or lower the US interest rate. In addition, the FOMC meeting also discussed the amount of money in the public supply (money supply), and decided to buy or sell government stocks and bonds. For example, to attract or reduce the amount of money in circulation in the economy, the Fed will conduct an open market operation by selling the government bonds it holds. These matters are related to the tightening of monetary policy and the easing of loose monetary policy.

How will the Federal Open Market Committee's decision affect you?

There are two well-known terms related to the FOMC decision that traders need to know, namely hawkish and dovish. Hawkish is a FOMC decision that favors monetary sector tightening, interest rate hikes (FFR), or monetary stimulus reductions. Meanwhile, dovish is the FOMC decision that is more inclined to monetary easing, interest rate cuts (FED Rate), or the addition of monetary stimulus. A hawkish 'tone' decision will usually encourage the strengthening of the US dollar. Conversely, dovish decisions will usually encourage a weakening of the US dollar. In forex, if the FOMC takes a hawkish decision, then the USD will strengthen and the market sentiment towards the USD will tend to be bullish. If the USD strengthens, it will result in other currencies facing the USD in one pair to weaken or decrease.  Conversely, if the FOMC takes a dovish 'tone' decision, then the USD will tend to weaken or decline. The USD decline could be even sharper when these FOMC decisions are unpredictable for the market. However, if investors can already predict this decision, then the USD cannot decline too far or could even potentially strengthen due to profit taking.

What should traders do before the FOMC meeting results are announced?

The best way to anticipate the Federal Open Market Committee meeting that will result in the Fed's interest rate decision amid uncertainty is to wait. There are several possible scenarios and their effects on USD are as follows.
  • Before FOMC meeting, then the movement of the USD will be influenced by two things, first, fundamental data on the US economy that can cause the possibility of interest rates rising or falling, namely labor data, unemployment, and inflation. Second, the statement of a high-ranking Fed official who is a member of the FOMC where he has the right to vote in setting interest rates.
  • After FOMC meeting,  if there is indeed an interest rate hike, then it is likely that the USD can strengthen, weaken or not react. The USD could strengthen if a rate hike is not anticipated in advance, or the likelihood is considered small. The USD did not react if the rate hike was predicted in advance. The USD weakens if the interest rate hike is predicted in advance, and the FOMC statement is dovish, or there are other issues that cause uncertainty such as political issues.

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