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Forex: Bearish Euro & JPY Setup in Focus Ahead of FOMC Meeting

Forex: Bearish Euro & JPY Setup in Focus Ahead of FOMC Meeting

2014-01-29 08:00:00
David Song, Gregory Marks,
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- Federal Open Market Committee (FOMC) to Taper Another $10B

- Ben Bernanke Attends Last Meeting as Fed Chairman

Trading the News: Federal Open Market Committee Meeting

The Federal Open Market Committee (FOMC) is widely expected to reduce its asset-purchase by another $10B as the benefits of quantitative easing now outweighs the costs, and the policy outlook may prop up the dollar in February as the central bank moves away from its easing cycle.

What’s Expected:

Time of release: 01/29/2014 19:00 GMT, 14:00 EST

Primary Pair Impact: EURUSD

Expected: $65B

Previous: $75B

DailyFX Forecast: $65B

Why Is This Event Important:

However, we may see a growing number of Fed officials favor a less-aggressive approach in normalizing monetary policy amid the spillover-effects to the global economy, and a material shift in central bank rhetoric may undermine the bullish sentiment surrounding the dollar if the FOMC implements a dovish twist to its forward-guidance.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Advance Retail Sales (MoM) (DEC)

0.1%

0.2%

Unemployment Rate (DEC)

7.0%

6.7%

Gross Domestic Product (Annualized) (QoQ) (2Q F)

3.6%

4.1%

The Fed may adopt a more neutral tone for monetary policy as the central bank anticipates a stronger recovery in 2014, and we may see a bullish reaction in the dollar should the committee lay out a more detailed exit strategy.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

U. of Michigan Confidence (JAN P)

83.5

80.4

Average Hourly Earnings (YoY) (DEC)

1.9%

1.8%

Personal Income (NOV)

0.5%

0.2%

Nevertheless, the FOMC may implement a wait-and-see approach amid the uncertainties surrounding the world economy, and the greenback may face a further decline over the near-term if the central bank shows a greater willingness to retain its highly accommodative policy stance for an extended period of time.

How To Trade This Event Risk(Video)

For Full Coverage of the FOMC Meeting, Join DailyFX on Demand

BullishUSD Trade: FOMC Delivers Another $10B Taper & Pledges to Stay on Course

  • Need red, five-minute candle following the print 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 Keeps QE at $75B; Sees Further Delay in Exit Strategy

  • 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

EURUSD Daily

Forex_Bearish_Euro_JPY_Setup_in_Focus_Ahead_of_FOMC_Meeting_body_Picture_2.png, Forex: Bearish Euro & JPY Setup in Focus Ahead of FOMC Meeting

Chart - Created Using FXCM Marketscope 2.0

  • Downward Trend Taking Shape Amid Failure to Close Above 1.3800
  • Bearish Divergence in Relative Strength Index Favors Downside Targets
  • Interim Resistance: 1.3800 (100.0 expansion) to 1.3830 (61.8 retracement)
  • Interim Support: 1.3490 (50.0% retracement) to 1.3530 (61.8% expansion)

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)

Dec 2013

12/18/2013 19:00 GMT

0.25%

0.25%

-30

-133

December 2013 Federal Open Market Committee Interest Rate Decision

Forex_Bearish_Euro_JPY_Setup_in_Focus_Ahead_of_FOMC_Meeting_body_Picture_1.png, Forex: Bearish Euro & JPY Setup in Focus Ahead of FOMC Meeting

Despite many market participants calling for the first taper of the Fed’s asset purchase program in March, the FOMC came out with a $10B taper split evenly between Treasury and MBS purchases. The surprise sent USD pairs whipsawing to the up and downside before finally ending in USD strength against the majors. Moving into Wednesday’s January FOMC meeting, it is important to note that the USDollar index is just slightly below where we were at the daily close of the last FOMC day. This is a critical juncture for global markets with emerging market currencies selling off with equities over the past week. If we are to see another $10B taper as expected, extreme volatility and USD strength cannot be ruled out. If the recent selloff and last NFP report force the Fed’s hand and lead the FOMC to delay a January/February taper, the greenback will certainly falter on the back of a dovish Fed decision. Note: there is no February meeting and this will be the last rate decision out of the Fed until March 19th.

--- Written by David Song, Currency Analyst

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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