The Pre-FOMC Announcement Drift: Is It Worth Taking Into Account?
05 September 2023
Hypothesis
In 2011, David O. Lucca and Emanuel Moench published their study showing that returns on U.S. equities tend to be higher in anticipation of scheduled meetings of the Federal Open Market Committee (FOMC). The research was called the Pre-FOMC Announcement Drift.
The authors attribute this pattern to the comforting presence of the Federal Reserve in the markets, especially in times of uncertainty. After all, the Fed's main mission is to maintain stability. And the FOMC meeting results are often intended to suppress volatility or provide reassurance to market participants.
Let's see if there is a spike in gold and silver prices in the 24 hours before the FOMC meeting.
How we check it
Event: Fed Interest Rate Decision
Symbols:
- Gold (XAUUSD). Test period: June 2004 – July 2023, number of trades: 148
- Silver (XAGUSD). Test period: December 2008 – July 2023, number of trades: 119
Timeframe: H1
Market Entry: Buying 8, 12, 24, 36, 48, 72 hours before the FOMC meeting.
Market Exit: Closing a position at the end of the hour just before the FOMC meeting.
Indicators:
Results
Gold
Silver
Conclusions
Gold and silver prices tend to rise in the 24 hours prior to the FOMC meetings.
The strategy of entering the market exactly 24 hours before the FOMC meetings proved to be the best one in terms of average return for silver.
For gold, the best strategy proved to be buying the metal two days in advance of the FOMC meetings.
Therefore, such a phenomenon as the Pre-FOMC Announcement Drift should be taken into account in trading strategies for gold and silver.
Appendices
Stock Market Anomalies: The FOMC 'Drift' Effect — the profitability of the Pre-FOMC Announcement Drift effect for trading U.S. indices and equities has been identified.
"Drift" of Metals Before FOMC Meetings — the profitability of the Pre-FOMC Announcement Drift effect for trading metals has been identified.
Detailed results of the research:
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