How to profit from expected rate hike?

Amazing, right? The most important event of this month is just a few hours ahead and you realise the announcement is already priced in. So… what to do in order to make a few bucks?

If you still don’t understand what I am talking about,... we’ve got a problem, Houston. The Federal Open Market Committee will announce its monetary policy decision concerning interest rates, which currently stand in a range between 1.00 percent and 1.25 percent, but not for long.

According to Fed funds tracked by CME Group’s FedWatch program, market participants are weighing in a nearly 100 percent chance of a rate hike at the December 13 monetary meeting.

As it happened in previous occasions, the rate increase is likely to be of 25 basis points, which would leave the benchmark rate between 1.25 percent and 1.50 percent.

The interest rate decision will be announced at 19:00 GMT on Wednesday, along with a revision of economic projections for the near future and a press conference set half an hour later.

Let’s be clear:

  • Will volatility increase significantly? Yes, as it always does.
  • Will the market go up or down? Depends more on Janet Yellen’s words rather than the decision.
  • Will I get the feeling charts are going nuts? Absolutely. But no worries, you can deal with it.

So… In order to make a profit when the interest rate decision is widely anticipated and priced in by investors, avoid trading in the first 30 minutes following the rate announcement.

Once you identify a clear movement (up or down), bet against it. Why? Nope, I am not crazy. Neither history. According to several studies, markets start correcting half an hour after rate announcements, and it makes total sense.

Interest rate decisions are very important. Don’t get me wrong. But they do not have immediate impact on the economy, therefore it’s a mainly speculative event. If you are not comfortable with risk, then better stay out of the market and watch it on Bloomberg or CNBC.

Source link   Presented by Fort Financial Services

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