Central banks hold massive influence over the global economy. All the decisions regarding the interest rate policies, control of inflation, and monetary policies create volatility across various financial markets. The great potential for rewards from the traders actually does exist if they can navigate turbulent waters. In fact, without a structured approach, most traders fail to make sense of all that is transpiring from central bank actions in the market.
In the subsequent weekly market report, we are going to focus on one of the most important central bank meetings, the Federal Reserve (FED), Swiss National Bank (SNB), and the Bank of England (BoE). The traders have to know how to react properly to these events and be prepared to make trades on currency pairs such as EUR/CAD, GBP/CHF, and indices like NASDAQ 100.
This article will detail three trading strategies of the central banks that a trader can use to grab money flows in the markets while minimizing risk. Focus on the key setups around the interest rate decisions, and you’ll find yourself better prepared for the turn of events in the week.
3 Profit from Central Bank Meetings
1. FED Strategy: NASDAQ 100 and the Rate Decision
One of the most significant news in the trading calendar this week is the Federal Reserve meeting. Even since that recent U.S. Consumer Price Index was released with a very strong inflation trend, markets have been very active. Whether the Fed has to raise rates or will just hold on, the market assumes that there is only 91% that they will leave the rate unchanged at 5.25%-5.5% for now.
Why NASDAQ 100?
The NASDAQ 100 Index is extremely sensitive to Fed rate decisions. Higher interest rates tend to send tech stocks down, while holding rates steady or cutting them could cause a surge. The index is positioned in the compression pattern, often the tightest part of the consolidation before a breakout.
Trading Strategy
- Watch for Fed’s Decision: Hold for the bullish momentum in NASDAQ 100 in case Fed holds the rates. Traders can push for a move towards the all-time high near 16,764, which could be a breakout.
- Positioning Before the Announcement: Taking into consideration the sentiment above, buyers should enter in the NASDAQ 100 before the Fed decision. A stop-loss just below recent swing lows around 15,500.
- Risk Management: Always maintain a minimum of 1:2 risk/reward ratio and ensure that your stop-loss and take-profit levels are scalable within the associated volatility expected when large news events are announced.
By doing this, there is an opportunity to profit from either a bullish breakout or a bearish retracement based on how the Fed deals with inflationary pressures.
2. BoE Strategy: GBP/CHF and Inflationary Pressures
Inflation seems to run amok in the UK, leaving the BoE under intense scrutiny. Traders are factoring in the case of another expected 0.25% rate hike that brings the rates to 5.5%. For the currency trader, this is a hot GBP/CHF opportunity this week; both the BoE and SNB will have their rate decisions.
Why would you trade the GBP/CHF?
In GBP/CHF, the pair is trading within a very tight range. The pattern is known as a “picket fence,” and it suggests that the market is coiling up to wait for a breakout. In most instances, conditions such as these create significant movements in price once central banks are going to act.
Trading Strategy
- Entry Point: Floating the GBP/CHF above the yearly low, it presents relatively good entry into long positions in case the BoE raises rates.
- Profit Target: Traders can look at price approaching and bidding at around the 1.10 level, taking profits just above it.
- Stop-Loss: Set a stop-loss close just below the yearly low in order to limit risk downsides.
Swiss National Bank Plan for the Unexpected:
Don’t forget about the Swiss National Bank this week. Markets are divided whether the SNB will hike to 2% or sit tight at 1.75%. But in case of a shocking decision by SNB, the rates may surge into volatility in the GBP/CHF.
- Emphasis on the Breakout: When SNB is neutral, but BoE hikes, expect a break out of the tight ranges on GBP/CHF. This could lead to full-on traders catching the rapid upside move.
- Fast Pullbacks: Prepare yourself for fast pullbacks if both banks surprise the market.
Determine the breakout with this strategy, while managing the risk by taking the most volatile time on both the pound and Swiss franc.
3. ECB and Oil: Buying the EUR/CAD
The ECB will be keen on inflation rates, but the fact is oil has been the primary factor for the EUR/CAD last week. As the crude prices continue to advance in the month of September, the CAD gains strength. It’s a great time to buy the oil-driven CAD with a Euro that may weaken on weak inflation.
Why EUR/CAD?
The EUR/CAD is trading quite close to a major Fibonacci level on the monthly chart at 1.4261 but also by using a double bottom formation. This pair has the possibility of a reversal ahead. Provided oil stabilizes into a decent range, and the Euro is capable of holding off a pullback, this is all very positive.
Trading Strategy
- Reversal Patterns: Search for reversal patterns, testing support above 1.4261, due to the potential of a rebound towards the 1.43-1.44 zone.
- Crude Oil Prices: Follow crude oil as a leading indicator for CAD strength. As oil prices start falling, the CAD could go weak, and the Euro would then have its chance to advance.
- Stop-Loss: Set a stop-loss just below the double-bottom support to restrict risk-loss odds in case of a trend reversal.
This approach does not rely on any form of technical analysis of the key support and resistance levels but rather takes into account the fundamental factors such as the oil prices and inflation figures in the Eurozone while determining an optimal entry level for trades.
Conclusion
Trading during central bank meetings requires some discipline, a good understanding of the market, and adaptability as information becomes available. With these three strategies by central banks—trading to target NASDAQ 100 on Fed’s decision, playing ahead of the BoE and SNB on GBP/CHF, and staying focused on EUR/CAD for oil-driven opportunities—you can capitalize on movements that are most likely this week.
Never forget that risk management is essential, especially during periods with high volatility. You would use stop-loss orders and position sizing to safeguard your account from conditions that may cause unintended shifts in market prices. Proper strategy can help you turn the decisions of central banks into profit opportunities rather than sources of uncertainty.
