The US dollar is the most widely held currency by the world’s central banks and is used as the designated global reserve. Because of this, the currency is hugely influential in the forex market and any data released with regard to the dollar have the potential to drive market prices.
When you open a position in the forex market on Plus500 for example, you will be purchasing a currency pair, which means you’re selling one to buy another. Currencies are traded in tandem, as their values are derived by directly comparing them against one another. The world’s most actively traded currency pair is the euro against the dollar, identified by its ISO code — EUR/USD.
No matter what currency pair you hold a position in, your trade could be affected by US economic data releases. Some of the most significant alterations to US economic policy take place in the Federal Open Market Committee (FOMC) meeting. In this article, we will explain what this meeting entails and how it could affect your position in the forex market.
Keep reading to find out more.
What is the FOMC?
The Federal Open Market Committee, also known as the Fed, determines the US monetary policy and makes adjustments periodically, according to the health of the nation’s economy. The Committee is made up of 12 members — seven members of the Board of Governors and five of the 12 presidents of the Reserve Bank. The committee meets eight times per year to discuss any changes that need to be made to the US economic policy. These meetings are plotted in an economic calendar, which you can use to keep track of any key events that could affect the forex market.
The FOMC Meetings
The FOMC meetings are highly anticipated, since the Fed can completely alter the US’ monetary supply, affecting the livelihoods of their nationals and the landscape of the financial markets.
The committee’s members will deliberate on the financial markets, in conjunction with financial and economic predictions for the future to decide whether the monetary policy needs to be changed. During the meeting, the members can change the federal funds rate — the rate at which financial institutions lend their Federal Reserve balances to one another.
A change to the Federal Reserve Rate can directly impact the value of the US dollar since when it is increased, it typically also collaterally increases the nation’s interest rates. Higher interest rates attract foreign investment and because these investors will have to exchange their currency for the US dollar in order to make purchases, the dollar will experience an increased exchange rate.
The FOMC will typically increase the Reserve Rate when inflation levels are high. The Federal Reserve aims to maintain an inflation level of around two percent, so you can expect rates to be adjusted when inflation passes this point. Increased rates will affect individual loans and mortgages, for example, and because spending will become more expensive, people will be encouraged to save.
When consumers spend less, inflation will gradually fall. Since exchange rates can appreciate when interest rates are high, prices are typically driven by the forex market as a result.
When trading in the forex market, there is a vast array of economic factors and events that can affect the value of currency pairs. The FOMC meeting is just one of these events, and other countries will also adjust their monetary policies on a regular basis.
To help you to keep track of all of these events, you should implement an economic calendar, since this will help you to plan ahead so that you can make market predictions in lieu of important dates. By using this resource, along with fundamental and technical analysis, you can best prepare yourself to profit from price movements that may occur.
