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Trade Setups in USD-pairs Ahead of FOMC

Trade Setups in USD-pairs Ahead of FOMC

Christopher Vecchio, CFA, Senior Strategist

Talking Points:

- EUR/USD threatens turn after yesterday's outside key reversal.

- JPY-crosses continue to look rather suspect.

- Read why a Fed rate hike this week is unlikely to help the US Dollar and see how it fits with the December seasonality forecasts.

"Currency Wars: The Fed Awakens" is set to hit theaters this afternoon. Well, maybe I have two things I've been looking forward to for a while a bit crossed, but the message the same. For the first time in nearly a decade, the Federal Reserve is set to normalize policy and move away from the zero-bound. (And likewise, if you didn't catch the pun, one of my favorite movie franchises will release their latest installment this week - alongside the FOMC today, it seems Christmas has come early this year.)

Theoretically, higher interest rates bode well for a currency. In practice, we've seen higher short-term yields support a stronger US Dollar over the past year, but that's largely due to markets pricing in the events that are set to transpire today. Whether or not the US Dollar can keep its bull run going in large part depends on if the Fed can keep markets pricing in widening interest rate differentials in its favor.

Around previous rate hike cycles, this has proved difficult; the Fed has typically raised rates quickly, leading to a corresponding increase in recession risk, thereby reducing potential future growth and undermining expectations for further rate rises. The risk this time is different: that the US economy is so fragile, the Fed won't be able to raise rates as quickly as it would like to, eroding the once-US Dollar favorable future discounting mechanism of the market.

See the above video for technical considerations in EUR/USD, GBP/USD, USD/JPY, NZD/USD, EUR/NZD, GBP/JPY and the USDOLLAR Index.

Read more: The Fed’s Hike this Week is Unlikely to Help the US Dollar

Lastly, as we approach the holidays and thus less liquid markets through the end of the year, it's worth reviewing principles that help protect your capital. We call these principles the "Traits of Successful Traders."

--- Written by Christopher Vecchio, Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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