WHAT IS FOMC IN FOREX TRADING?

Introduction

The full meaning of FOMC is Federal Open Market Committee. It is a branch of the FED (Federal Reserve) that helps in making decisions on interest rates, monetary policy, and money supply in general. FOMC hosts their meeting eight times within a year.In this article, I will be giving a detailed explanation of what FOMC is all about and how it affects the Forex market and the Forex traders at large. For the fact that each time the federal open market committee takes any decision, it always causes volatility and fluctuations in the market, that’s why I’ll be explaining how a trader can approach the decision made by the FOMC in order to make a significant profit from the market.

WHAT IS THE MEANING OF FOMC?

Just as I have said above, the Federal Open Market Committee is part of the Federal Reserve that is in charge of regulating the US monetary policy and money supply. Their policy or meeting outcome always has an impact on employment, inflation, recession, and economic changes.Just as the FED uses a reserve market operation, the FOMC, on the other hand, uses an open market operation; this enables them to have a stable price and a good employment rate. Decisions made by the FOMC always have some effect on the value of some currencies, especially the ones that are paired to the U.S. dollars. This made traders and investors watch their assets closely to make changes when it’s necessary.

WHAT ARE THE FUNCTIONS OF FOMC?

1. One of the functions of FOMC is to regulate, set, and maintain the federal funds rate. This federal funds rate can also be called an interest rate. Banks lend each other loans with interest; this interest rate is regulated by the FOMC. The interest rate set by the FOMC affects customers and investors on how they spend or invest their money, respectively.For instance, when there is high inflation in the country’s economy, the FOMC tends to increase the interest rate, thereby scaring the investors away and also reducing individual excessive spending.
2. FOMC also conducts Open Market Operations (OMOs), which involve the buying and selling of government securities; this action helps to regulate the money supply in the economy.Each time the FOMC buys the government securities, there will be a high inflow of liquidity into the economy, and if they decide to sell the government securities, there will be an outflow of money in the economy. This helps to regulate spending and also prevent the economy from booming excessively.
3. The FOMC makes statements about the likely future direction of interest rates and other economic conditions. This prior statement is called “forward guidance.”This prior notice helps investors and individual businesses to be aware and know what to expect from the FOMC upcoming decisions. This forward guidance policy makes them get ready for the changes that are about to take place in the economy and for them to make the necessary adjustments where it is needed.

HOW DO FOMC DECISIONS AFFECT THE FOREX TRADING MARKET?

1. Just as I have said before, one of the primary tasks of the FOMC is setting interest rates. Increasing or decreasing the interest rate always affects the US dollar. Increasing the interest rates makes the dollar stronger and also attains value, but if the interest rate is reduced, the US dollars will weaken. Forex traders who add fundamentals to their trading strategy always watch this FOMC news closely, as it helps them in decision-making while trading.
2. After every FOMC meeting, they always release a statement, which is like a projection of the economy. This statement can be a positive or negative outlook; if it’s a positive expectation, that means traders will be expecting some increase in the interest rate, which will definitely strengthen the value of the dollar. But if it’s a negative outlook, then the interest rate can be reduced, which will affect the dollar by making it weaker. Forex traders watch this FOMC meeting closely so that they can make a better decision on their trades.
3. Quantitative Easing, which FOMC always applies to regulate the US economy, is what traders also watch closely because it has an effect on the forex market in general. Quantitative Easing, just as I explained before, is all about buying and selling of government securities. When the FOMC decides to buy government securities, it leads to a reduction in the interest rate, thereby making the dollar weaker. On the other hand, if they make the decision to sell the government securities, the interest rate will be increased, which will make the dollar stronger. This information is what every Forex trader looks out for to make decisions while trading.
4. FOMC has some impact on other countries. When the FOMC increases or decreases their interest rate to stabilize their economy, other countries’ central banks that trade with the US Dollar will do the same to stabilize their own economies. A professional trader pays close attention to this economic adjustment to make better trading decisions.
5. Traders always keep a close watch on inflation indicators before the FOMC meeting. When the indicator shows a high inflation, the FOMC will increase the interest rate to make the US dollar gain strength, but if the indicator shows a very low inflation, the FOMC will adjust the interest rate by cutting it down; this may affect the dollar by making it weaker. Increasing and decreasing the interest rate is to make the inflation be within a certain target range, which is 2%.

HOW CAN A FOREX TRADER TRADE THE FOMC MEETING PROFITABLY?

1. Forex traders who wish to be trading the FOMC meeting outcome should always check out the previous decisions and the impact on the market, as this will help predict the outcome of their next decisions from the meeting.
2. Traders should pay more attention to the interest rate adjustment. Because an increase in the interest rate will strengthen the US dollar, while a decrease in the interest rate will weaken the dollar. This knowledge will help traders make good trading decisions on the currencies that are paired to the US Dollars.
3. A trader should have a good technical strategy for approaching the outcome of the FOMC meeting and always remember to follow the trend of the market at that particular point.
4. Unless you are using a buy stop and buy limit or a sell stop and sell limit, it is not advisable to enter any trade immediately the news comes out because of the liquidity clearing and high volatility in the market. You can wait for the market to settle a bit before entering.
5. Lastly, proper risk management still remains top-notch; every Forex trader is always advised to apply proper risk management as Forex can be risky and doesn’t guarantee profits. So, risk what you can afford!

CONCLUSION:

The Federal Open Market Committee (FOMC), which regulates the interest rate and stabilizes the United States economy, also plays an essential role in moving and giving direction to the Forex market.FOMC maintains economic stability and also promotes economic growth. They achieve this by regulating the interest rate, employment rate, and buying or selling government securities.All these FOMC decisions have an impact on the Forex market, especially those currencies that have been paired with the US Dollar.Traders study this FOMC and how they operate to help them make better trading decisions.If you wish to know more about trading, you can join my Telegram community, where I groom newbies on how to be profitable through swing trading.