By Admiral Markets

Ahead of tonight’s FOMC decision, traders should be careful with trading Equities as we may get some de-risking ahead of the decision. By this, I think that Funds may sell stock ahead of the decision in case the Fed does a surprise and hikes rates. So keeping that in mind, watch for potential weakness in Equities today, and then expect a lot of volatility around decision time.

The analysis is based on important levels and confluence to look for with the Dax based on 4 different scenarios:

1. Rate Hike by 25bps, and a move to a normalisation of the Fed cash rate (Hawkish)

This is above market expectations, by some 15bps, so this will cause a major negative shock to risky assets like stocks. I could see the Dax hit new interim lows, possibly with a 300pts drop. Key level to watch is L3 camarilla support at 10212, and a possible extension in days to come at the Weekly L5 at 9996.

2. Rate Hike by 10bps, and a move to steady normalisation of the Fed cash rate (Slightly Hawkish)

This is current market expectations based on the Bonds market, and seems unlikely as they normally increment by 25bps when doing so. This again could cause a negative shock to stocks, but as the market has priced this in the Bond markets then we may see a drop to the recent lows and support found at the L3 at 10289.

3. No Rate Change, hint of rate hike in upcoming months (Neutral)

This is closer to market expectations, as we are now near a 60% chance based on market expectations of a rate hike in December 2016. This is likely to cause a slight negative shock to stocks, but I see the key level to watch on the Dax is the H3 at 10376, which I perceive as a marker level for any potential upside move that may follow in coming days as this signals to the market that the US economy is still strong but with no monetary tightening at present.

4. No Rate Change, and no rate hikes imminent (Dovish)

As this will be below market expectations, I expect there to be a push to new market highs on the Dax in coming days, with a possible extension above the H5 to 10780pts.

FYI: If you ask why DAX and Fed are in opposite correlation here is the explanation. Dax would be bearish if Fed is Hawkish, because when US increase interest rates, it means investors can put their money into Bonds/Fixed Income for higher returns than before, causing investors to leave risky assets such as stock markets.

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Article by Admiral Markets

Source: Pre FED DAX deep analysis: 4 possible scenarios

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