It’s Do-or-Die time for the Euro/US Dollar ahead of FOMC Decision
Fundamental Forecast for Euro: Neutral
- Euro breaks to fresh September highs versus downtrodden US Dollar
- Dollar resilience nonetheless tells us most wait results of next week’s critical Fed decision
- US Federal Reserve takes main stage in the week ahead
The Euro broke to fresh multi-week highs against the US Dollar, but the Dow Jones FXCM Dollar Index (ticker: USDOLLAR) continues to hold key multi-month lows. All eyes now turn a highly-anticipated US Federal Reserve policy announcement to drive FX moves.
The Federal Open Market Committee (FOMC) decision on September 18 will be the major driver of currency volatility in the coming days, and European event risk is relatively limited. What could the Fed do to break the US currency and broader markets out of increasingly narrow trading ranges?
Fed Officials are widely expected to announce the start of the so-called “Taper” of the central bank’s Quantitative Easing measures. According to a Bloomberg News survey, most economists polled believe that the FOMC will cut its monthly purchases of US Treasury debt by $10 billion. Yet it’s the wide range of estimates that underlines how little we know of the Fed’s next steps. According to the same survey, 33% predict zero tapering while some anticipate as much as $20 billion in cuts.
We look to interest rate markets to guide us. US Dollar interest rate futures showed a sharp drop in Fed interest rate forecasts following a disappointing US Nonfarm Payrolls report for August. Yet the initially strong reaction to the labor data has since turned into consolidation; no one seems to be willing to make big bets ahead of the Fed.
The fact that the Euro trades near its highs and the USDOLLAR is just barely holding lows suggests that the EURUSD could break higher in the days ahead. Currency volatility has dried up in a major way, and it feels like the next big move is just around the corner.
Our retail FX sentiment-based strategies have bought into Euro strength and remain positioned for a move higher. Whether or not se see the major break depends almost completely on the Fed’s next steps. It’s difficult to predict what the FOMC might do and much less how markets might react.
In the meantime, we’ll brace ourselves for continued choppiness as currencies move in progressively smaller trading ranges. - DR