USD/JPY, Gold, and S&P 500 Market Analysis: Impact of Fed Decisions on Trading Trends

The Fed's Upcoming Decision and Market Reactions

This Wednesday, the Federal Reserve is poised to announce what is anticipated to be the last 25 basis point cut of the year. As consensus among economists and market participants aligns with this expectation, any unexpected hold on rates would certainly create a contrarian response. However, it seems likely that the Fed will utilize this opportunity for a cut in anticipation of potential inflationary policies that could accompany Trump's return to the White House. Importantly, the Fed has the ability to raise rates in the future if needed.

Looking ahead, next year's interest rate projections will be crucial. The markets, which had previously priced in a series of cuts, are beginning to adjust expectations downwards. If the Fed signifies a reduction to only two cuts for the next year, we might see a stronger dollar facing resistance in the near term. It's also plausible that we will encounter a "buy the rumor, sell the fact" scenario for the USD, especially as it continues to receive backing alongside rising yields while investors brace for a more hawkish stance from the Fed. This sentiment will contribute to the historically negative trend often seen on Fed days, which we will discuss further shortly.

A quick reminder is in order regarding the USD's performance in December. Historically, the dollar tends to weaken during this month, with most declines occurring in the latter half. Particularly, from December 22nd to 31st, the dollar experiences negative average returns, coupled with a low win rate during this period.

USD Index Trends Surrounding Fed Meetings:

• The USD index has demonstrated negative average and median returns on Fed meeting days, based on data from 2007 to present.
• Historically, there is a clear negative bias for the USD across the last 36 Fed meetings.
• However, recent Fed meetings have seen generally lower daily ranges.
• Interestingly, the USD tends to perform positively as it heads into the weekend.
• The daily range tends to peak the day after Fed interest rate announcements.

USD/JPY Trends Around Fed Meetings:

• A notable negative bias for USD/JPY is evident leading up to Fed decisions.
• The most pronounced negative returns typically occur the day following Fed day.
• Movements on Fed day itself appear random regarding up or down closes in recent meetings.
• The average daily range is generally highest on Fed days based on median returns.
• This average daily range has been trending upward in recent meetings.

S&P 500 Trends Surrounding Fed Meetings:

• Median returns have been positive in the three days leading up to and including Fed day, with average returns also reflecting positivity on the prior Tuesday and on Fed day.
• Over the past year, there has been a significant reduction in volatility on Fed days.
• Returns on Fed days have not shown a consistent directional bias during recent meetings.

Gold Trends Surrounding Fed Meetings:

• The Tuesday before Fed interest rate decisions typically yields the strongest average returns, followed by Fed day itself.
• Positive median returns are most significant on the Friday following Fed day.
• Notably, the daily range on Fed day has been trending lower over the last eight meetings.

Getting Started with FOREX.com

To begin trading with FOREX.com, follow these simple steps:

1. Open a Forex.com account, or log in if you're an existing customer.
2. Search for the currency pair you wish to trade on our award-winning platform.
3. Select your position size along with your stop and limit levels.
4. Execute your trade.