How To Trade Wednesday's Fed Decision

The Federal Reserve’s Federal Open Markets Committee is all but guaranteed to increase the federal funds rate after Wednesday’s meeting. The CME’s fed fund futures tool is giving a 0.25 percent hike a 93.8 chance of happening, and a 0.5 percent hike a 6.2 percent chance.

FOMC announcements are historically the most volatile times for interest rate securities, as the entire market will be watching to see the language Fed Chair Jerome Powell uses to describe future actions. As TD Ameritrade Chief Market Strategist JJ Kinahan put it, “When we already know what the outcome will be, it puts more emphasis on what they say going forward.”

Looking at the five main interest rate securities ahead of the meeting, they all look to be in clear downtrends. This is, of course, not a complete surprise considering treasuries have an inverse relationship to interest rates. But the market will be more interested in the Fed’s forward-looking statements on Wednesday. With that in mind, let’s take a look at what the charts tell us about what could happen to the most interest rate-sensitive securities in the coming days. We can use VantagePoint Software, which use artificial intelligence and intermarket analysis to make 1-3 day forecasts accurate up to 86 percent of the time, to forecast what will happen this week.

US T-Note Futures

The 10-year US T-Note Futures have been in a steady downtrend for the last three months, which you can see on the chart below. The blue line represents a predicted moving average, while the black shows a simple 10-day moving average. As long as the blue stays below the black, that indicates a clear bearish signal.

We’ll also point out that VantagePoint’s Neural Index, which forecasts temporary strength or weakness in a given market, has mostly been in the red. Monday’s shift to green is promising, but we’ll need to see more before it’s time to get bullish.

Chart courtesy of VantagePoint

The same can be said when looking at charts of 5-Year US T-Note Futures and 2-Year US T-Note Futures. Because T-Note futures are all heavily correlated, all three markets are currently forecasted to continue in their current downtrend throughout this week.

5-Year US T-Note Futures

Chart courtesy of VantagePoint

2-Year US T-Note Futures

Chart courtesy of VantagePoint

Eurodollar Futures

Eurodollar futures, which reflect expectations for interest rates on three-month Eurodollar deposits, are also showing a clear downtrend, albeit slightly less pronounced than T-Note futures. This market has experienced a tighter range over the last few months with more short-term upswings. That has us mindful that another could take place shortly, though we’ll need to see the two moving averages converge or the neural index turn green.

Chart courtesy of VantagePoint

US Treasury Bond Futures

US Bond futures have come off hard from their August 27 highs, and are now at their lowest point since May. In particular, we’ll note the divergence of the two moving averages over the last week or so, indicating this trend has only gotten stronger.

Chart courtesy of VantagePoint

Though VantagePoint is forecasting continued downside for all of these markets, there is almost certainly going to be volatility around 2 pm ET on Wednesday when the Fed announces their decision. That volatility will present an opportunity for traders looking to capture profits on upward or downward movement.

VantagePoint is a content partner of Benzinga. To get a more detailed look at their charts or a free demo, click here.