Uncertainly Ahead of Federal Reserve Meeting

Forex trader became cautious this week ahead of the Federal Reserve meeting to set interest rates scheduled for Wednesday, October 31.

Perhaps it’s the Halloween date of the meeting that has forex traders slightly spooked. More likely it’s because it is very difficult to guess what the Fed might do as a follow up to last month’s 50 basis point interest rate cut in both the discount and federal funds rates.

Treasures had rallied sharply in recent weeks on the market’s perception that the Fed would likely decide on another half percentage rate cut following a similar reduction in September that surprised and pleased investors. But that view was in doubt and investors were reluctant to bid prices up on Monday.

As treasuries rallied over the past few weeks the US Dollar continued on its downward course as short term interest rates declined. Further interest rate cuts will likely keep the Dollar under pressure.

“The market may have gotten a little too optimistic,” said Tom di Galoma, head of Treasurys trading at Jefferies & Co. Traders are now expecting a .25 basis point rate cut.

Investors Monday also tried to reconcile the cautiousness of recent speeches by Fed Chairman Ben Bernanke and his central bank colleagues with traders’ a certainly that a rate cut is in the works. Fed officials in recent speeches have stressed that policy decisions at this time are even more challenging than usual.

While the Fed and Treasury probably want to see the Dollar continue to fall, no matter what they may say in public statements, as a weak Dollar helps the US export market over the short term, they probably are concerned about at some point triggering a sharp fast destabilizing Dollar fall.

This is probably a good meeting to watch from the sidelines. Given the opportunity I would look to sell Dollar rallies.

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