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Euro at Crossroads Ahead of FOMC Policy Meeting

Euro at Crossroads Ahead of FOMC Policy Meeting

2010-03-15 11:02:00
Michael Wright, Currency Analyst
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Fund Vs. Tech
Fundamental Outlook
The Federal Open Market Committee is widely expected to hold its key benchmark interest rate at 0.25% this month as policy makers aim to balance the risk for growth and inflation. Indeed, investors are weighing in a zero percent chance that the Fed will increase borrowing costs twenty five basis points from its current record low, according to the Credit Suisse overnight index swaps. At the same time, the Fed Funds Implied Probability shows that investors are pricing in a seventy two percent chance that central bank will keep borrowing costs unchanged.

Indeed, the decision last month to keep interest rates at its current low was not unanimous as Thomas Hoeing voted against the policy action, stating that he believed that it was no longer advisable to indicate that economic and financial conditions were likely to “warrant low levels of the federal funds rate for an extended period.” Mr. Hoeing later added that it would be more appropriate for the central bank to express an expectation that rates would be low for “some time” rather than for an “extended period.”  Thus, price action following any comments may provide clear direction for the EUR/USD technical outlook, following lackluster trading in the pair for the past couple of days. However, it is noteworthy that any dovish language following the rate decision, paired with the recent statement of Moody’s Managing Director Pierre Cailleteau, stating that the U.S. have moved closer to losing its AAA rating may send EUR/USD higher in the near term.


Technical Outlook

EUR/USD
Fund Vs. Tech

EUR/USD: The pair recently crossed over above the short term descending channel and now looks to test the upper trend line of the longer term descending channel for resistance. Indeed, the pair has halted its decline at the 61.8% Fibonacci retracement, and a fourth wave may be near completion, which is right at the 50.0% Fibonacci retracement. It is also noteworthy that a sharp pickup in FX Options Risk Reversals suggests the pair may bounce through the upcoming trade as trader’s hedge and bet on a potential rally in the currency.

For More Technical Analysis Visit the DailyFX Technical Page


Written by Michael Wright, Daily FX Research
Questions? Comments? Email me at instructor@dailyfx.com


 

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