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A Dovish FED Would Validate Bearish EURUSD Technical Outlook

Tuesday, 16 September 2008 06:44:59 GMT  |  John Rivera, Currency Analyst

The FOMC is expected to keep the overnight rate unchanged at 2.00% as the easing of inflation and continued turmoil in the financial markets is expected to have changed the central bank’s hawkish bias. The dollar’s recent rally had its roots in the growing outlook for a future rate hike based on increasing inflationary pressures.

Fundamental Outlook

The FOMC is expected to keep the overnight rate unchanged at 2.00% as the easing of inflation and continued turmoil in the financial markets is expected to have changed the central bank’s hawkish bias. The dollar’s recent rally had its roots in the growing outlook for a future rate hike based on increasing inflationary pressures. The recent events of Lehman Brother’s filing for bankruptcy, Merrill Lynch’s purchase by B of A and AiG’s troubles has led to speculation that a rate cut is forthcoming. Indeed, the fed funds futures are pricing in a 68% chance of a rate reduction. Although the majority of economists surveyed believe that the FOMC will leave rates unchanged, a clear shift in bias could bring out dollar bears. This would support the EURUSD technical outlook which is calling for a dollar decline. However, a resolution to AiG’s problems and a clear sign that further easing isn’t forthcoming could add dollar support.

 

Technical Outlook

The Euro’s sharp reversal off of recent spike-lows of 1.3872 left us with a bullish short-term bias, and overall risks still remain for a test of previous support and the 38.2 percent Fibonacci retracement of the 1.6040-1.3870 move at 1.4700. Only a break of 1.3872 would negate our current bullish bias for the euro against the US dollar. As we wrote on Friday, “a hammer formation on yesterday’s candle suggests that this may be the start of a larger reversal—especially as recent EURUSD COT data shows that forex positioning reached an extreme through recent trade.”

For More Technical Analysis Visit the Daily Technical Report

To discuss this report contact John Rivera, Currency Analyst: jrivera@fxcm.com

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