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EUR/USD Threatens Trendline Resistance Before FOMC- Breakout on Tap?

By , Currency Analyst  and Gregory Marks
30 April 2014 11:50 GMT

- Federal Open Market Committee (FOMC) to Reduce QE by Another $10B.

- FOMC Meeting Minutes Due Out on May 21.

Trading the News: Federal Open Market Committee Meeting

Another $10B reduction in the Federal Open Market Committee’s (FOMC) asset-purchase program may have a limited impact in propping up the greenback, and it seems as though we would need a material shift in the policy outlook to see a bullish U.S. dollar reaction as the central bank continues to highlight the ongoing slack in the real economy.

What’s Expected:

EUR/USD FOMC

Why Is This Event Important:

Indeed, the dollar may struggle to hold its ground should Fed Chair Janet Yellen continue to highlight a dovish tone for monetary policy, and the bearish sentiment surrounding the reserve currency may gather pace throughout the first-half of the year as the central bank remains reluctant to move away from its zero-interest rate policy.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Durable Goods Orders (MAR)

2.0%

2.6%

Consumer Price Index ex Food and Energy (YoY) (MAR)

1.6%

1.7%

Advance Retail Sales (MoM) (MAR)

0.9%

1.1%

A growing number of Fed officials may show a greater willingness to normalize monetary policy sooner rather than later amid sticky inflation paired with the resilience in private sector consumption, and the dollar may show a bullish reaction to the FOMC meeting should the central bank adopt a more hawkish tone for monetary policy.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Change in Non-Farm Payrolls (MAR)

200K

192K

ISM Non-Manufacturing (MAR)

53.5

53.1

ISM Manufacturing (MAR)

54.0

53.7

However, the bar remains high to see a material shift in the policy outlook as the central bank continues to identify the persistent slack in the real economy, and the dollar may face additional headwinds over the near-term as the Fed talks down interest rate expectations.

How To Trade This Event Risk(Video)

To Cover the Market Reaction to the FOMC Meeting, Join DailyFX on Demand

BullishUSD Trade: FOMC Cuts Another $10B & Shows Greater Willingness to Normalize

  • Need red, five-minute candle following the release to consider a short EURUSD trade
  • If market reaction favors a long dollar trade, short EURUSD with two separate position
  • Place stop at the near-by swing high/reasonable distance from entry; look for at least 1:1 risk-to-reward
  • Move stop to entry on remaining position once initial target is hit, set reasonable limit

Bearish USD Trade: Fed Continues to Highlight Dovish Tone for Monetary Policy

  • Need green, five-minute candle to favor a long EURUSD trade
  • Implement same setup as the bullish dollar trade, just in opposite direction

Potential Price Targets For The Rate Decision

EUR/USD Daily

EUR/USD Threatens Trendline Resistance Before FOMC- Breakout on Tap?

Chart - Created Using FXCM Marketscope 2.0

  • Price & RSI Threatening Trendline Resistance; Higher High on Tap?
  • Interim Resistance: 1.3960-70 (61.8% expansion)
  • Interim Support: 1.3800 (100.0% expansion) to 1.3830 (61.8% retracement)

Impact that the FOMC Interest Rate Decision has had on EUR/USD during the last release

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

MAR 2014

03/19/2014 18:00 GMT

0.25%

0.25%

-100

-101

March 2014 Federal Open Market Committee Interest Rate Decision

EUR/USD Chart

As expected, the Federal Reserve reduced its asset purchase program by $10B in March leaving the total monthly purchase total to $55B per month. As has been stated by one FOMC member after another, excluding any major financial disruption it is likely that we will continue to see a $10B taper per month with the QE3 program coming to an end by the end of the fourth 2014 quarter. Following the rate decision and release of updated forecasts we saw broad based USD strength with the EURUSD pair falling 100 pips within the hour.

--- Written by David Song, Currency Analyst and Gregory Marks

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

To be added to David's e-mail distribution list, please follow this link.

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30 April 2014 11:50 GMT