Risk Event – Trade With Caution

Well here we are. It’s Wednesday and the highly anticipated FOMC statement is due out around 2 p.m.

I consider this a “risk event” and advise trading with caution – even AFTER the statement has been made public.

It’s my feelings that “this one in particular” should act as the catalyst or “trigger” for the next larger scale move in markets, as traders look for further clarification ( or any clarification for that matter ) as to what on Earth the Federal Reserve is planning to do next.

With the clouded daily talk of “tapering vs no tapering” and the fact that U.S equities have been trading virtually flat for the past 2 weeks, it looks pretty clear to me that equity traders ( completely “jacked up” on QE ) have put on the brakes and entered “holding patterns” until the smoke clears here this afternoon.

Firm statements confirming that “yes indeed” the Fed is planning to start its tapering in September will send the market down fast, as equally mention of continued QE of 85 billion per month “should” keep things buoyant (although in this case I wouldn’t really count on that either).

This has gone far enough, and further suggestion of “continued easing” should be interpreted as “being needed” which is essentially suggesting that the “so-called recovery” is still very much in need of assistance. With USD “still” wallowing here at its near term lows – we will likely see some kind of “knee jerk reaction” to the statement, and then see markets digest the news  and move accordingly.

I am 100% cash as this is most certainly a “risk event” so……my plans are to wait until “after” the statement, evaluate market reaction – THEN jump on it.

Watch Twitter here this afternoon, or perhaps even here at the site for a quick “afternoon update” and suggestion as to how to take advantage.

Post-FOMC Market Navigation: Reading Between the Lines

Currency Pair Implications Beyond the Initial Reaction

While everyone’s watching USD/JPY for the obvious carry trade implications, the real money is going to be made understanding how this FOMC decision ripples through the commodity currencies and emerging market pairs. If we get confirmation of September tapering, expect AUD/USD and NZD/USD to get absolutely crushed as risk appetite evaporates. These pairs have been living on borrowed time, propped up by the very QE policies that are now under threat. The Australian dollar in particular is vulnerable here – with China’s growth concerns already weighing on commodity demand, any reduction in global liquidity could send AUD/USD below the 0.90 handle faster than most traders anticipate.

EUR/USD presents a more complex picture. The euro has been surprisingly resilient despite the ongoing peripheral debt concerns, largely because traders view it as the “least worst” alternative to holding dollars during this QE uncertainty. But here’s the thing – if the Fed actually commits to tapering, we could see a violent reversal in EUR/USD as dollar strength reasserts itself. The 1.32 level becomes critical support, and a break there opens up a move toward 1.28 or even lower.

Reading the Fed’s Body Language: Beyond the Headlines

Don’t get caught up in the initial headline reaction – the real trading opportunities emerge in the hours and days following these statements. The Fed has mastered the art of saying nothing while appearing to say something, and Bernanke’s press conferences are exercises in careful ambiguity. What we need to watch for are the subtle shifts in language around employment thresholds and inflation targeting. If they start hedging their 6.5% unemployment trigger with more qualitative language about “labor market conditions,” that’s your signal that tapering timelines are becoming more flexible.

The bond market reaction will tell us everything we need to know about whether traders are buying the Fed’s messaging. If 10-year yields spike above 2.8% and stay there, the tapering expectations are being priced in aggressively. This creates a feedback loop where higher yields actually tighten financial conditions before the Fed has done anything – effectively doing their job for them. Smart money will be watching this yield action more closely than whatever carefully crafted statement comes out of Washington.

Volatility as Your Trading Edge

Here’s what most retail traders miss: the real opportunity isn’t in predicting which direction the market moves – it’s in understanding that volatility itself becomes the trade. Options markets have been pricing in massive moves around this announcement, and someone’s going to be wrong about the magnitude. If we get a “dovish taper” where they announce QE reduction but push out timelines or reduce the pace, we could see volatility collapse as quickly as it spikes.

This is where position sizing becomes absolutely critical. The traders who get burned on FOMC days are the ones who bet the farm on a directional move. Instead, think about volatility plays – buying straddles on major pairs before the announcement, or waiting for the initial spike to fade and then fading the move itself. USD/CAD often provides excellent range-bound trading opportunities in the 24-48 hours following FOMC statements, as the initial volatility settles into more predictable patterns.

The Bigger Picture: QE Exit Strategy Reality Check

Let’s be brutally honest about what’s really happening here. The Fed has painted themselves into a corner with this QE policy, and they know it. They’re desperately trying to engineer a soft landing from the most aggressive monetary experiment in modern history, but the markets have become completely addicted to the monthly liquidity injections. Any attempt to wean the system off this artificial support is going to create withdrawal symptoms – and those symptoms show up as volatility spikes, credit spread widening, and emerging market capital flight.

The smart money isn’t just positioning for this FOMC statement – they’re positioning for the multi-month process of QE unwinding that starts here. This means getting long dollar strength themes, short risk assets that have been QE beneficiaries, and prepared for the kind of two-way volatility that creates fortunes for disciplined traders. The age of “buy everything and hold” is ending, and the age of tactical, nimble trading is beginning.