The testimony continues... | Forex Fundamental Analysis

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The testimony continues...

Wednesday, 24 September 2008 14:32

The Fed Chairman testified to the joint economic committee (US Congress) today. The tone was similar to yesterday's with predictions of gloom and doom for the economy. This strikes me as interesting that the Fed is much more "certain" about their predictions for the future than they normally are. I find this is typical when a trader is "talking their position." The more hazardous or precarious their position becomes, the most confident and emotionally invested they are.

The testimony is happening at an interesting time as the Fed broke with "tradition" and drained $25 billion from the market last night. This was likely an attempt to try and bring rates back up closer to the Fed target of 2%. The last time this happened as late March and early April of 2008 and coincided with the absolute top of the EUR/USD. Seeing the USD strengthen after that kind of Fed action is not unexpected since removing cash increases the cost of capital.

Obviously, the politics of this situation are volatile but so is the market. The Fed overnight rate hit 1/16% overnight as a low. That is about as close to zero that you can get. That kind of volatility really means one thing and that is that risk is on the rise and not likely to change anytime soon. This is good for traders looking for a new opportunity. I feel like the risk is biased towards a stronger dollar as debt yields start to rise in the near term but the opportunity exists to take advantage of the breakout regardless of direction.

Strangling or straddling this market with options is one alternative as is waiting for the breakout and then trading with momentum. In either case, the subsequent move and trend that emerges as traders start dealing with the new state of the market is likely to be big enough for anyone with a pulse and a trading account to profit.

Its a great time to be in the market.

- The article from 9/22/2008 is a preface for this article. You can read it here.

- To learn more about forex investing click here.

Do you agree or disagree? Love the Fed and think they are getting a bad rap? Comment in the forum.

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