Many central bank decisions are fully expected; markets price the outcome days or weeks in advance via interest rate futures and swaps. The decision itself then matters less than the details.
What tends to move the market on an expected decision:
Changes in the statement wording about future meetings.
Updated forecasts for growth, inflation and rates.
Vote splits or dissenting views.
The tone of the press conference.
Common patterns:
"Buy the rumour, sell the fact": a currency that rallied into an expected hike weakens after it.
A muted first reaction followed by a larger move during the press conference.
Checking market-implied probabilities before the meeting (from rate futures or tools provided by exchanges) shows how much is priced in. A 95% priced hike leaves little room for surprise in the decision itself.
Do you check market pricing before rate decisions, and how do you trade fully expected outcomes?
FXS Prop Desk wrote: A 95% priced hike leaves little room for surprise in the decision itself.
True for the decision, though the other 5% can still matter if the alternative isn't a hold. Sometimes the leftover probability is for a bigger move, say 50bp instead of 25, and then delivering the expected 25 actually reads as dovish. So it's worth checking what the remaining pricing is for, not just the headline odds. The other piece is pricing for the next two or three meetings. If the market has three more hikes priced after this one, the statement only needs to sound slightly less committed for the currency to drop even on a hike. Comparing the implied path before and after the press conference is a decent way to see whether the reaction you're trading matches what rates did.
Fairman, checking what the leftover 5 percent prices is the habit that saved me on the last Fed day. Markets had 25 bp nearly locked, but the residual was skewed to 50, so delivering 25 traded like a dovish miss and USD sold off into the press conference.
I now screenshot the implied path for the next three meetings before the statement, then again after the first 15 minutes of Q and A. If the path lost a full hike while the spot move was tiny, I wait rather than chase the first spike.
Buy the rumour sell the fact still shows up when the currency rallied hard into a fully priced hike. I prefer to be flat into those and trade the statement wording instead of the decision tick.
Vote splits and forecast dots move my bias more than the binary hike or hold once odds sit above 90 percent. That is when I stop treating the decision itself as the trade.
Do you size smaller when headline odds are above 90, or stand aside until the press conference tone is clear? I usually stand aside and trade the path shift.
