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EUR/USD Range Vulnerable on FOMC’s Updated Forecasts

EUR/USD Range Vulnerable on FOMC’s Updated Forecasts

2014-06-18 11:25:00
David Song, Strategist
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- Federal Open Market Committee (FOMC) to Reduce QE by Another $10B.

- Fed Chair Janet Yellen to Hold Press Conference at 18:30 GMT.

Trading the News: Federal Open Market Committee Meeting

Despite expectations for another $10B reduction in the Federal Open Market Committee’s (FOMC) asset-purchase program, the central bank’s updated forecasts (growth, inflation & interest rate) may have a greater impact in driving the U.S. dollar as market participants weigh the outlook for monetary policy.

What’s Expected:

EUR/USD FOMC

Why Is This Event Important:

Indeed, there’s limited scope of seeing a material shift in the Fed’s policy outlook as Chair Janet Yellen remains reluctant to normalize monetary policy, and the interest rate decision may spur a bearish dollar reaction (bullish EUR/USD) should we get more of the same from the central bank.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Consumer Price Index (YoY) (MAY)

2.0%

2.1%

Change in Non-Farm Payrolls (MAY)

215K

217K

Personal Consumption Expenditure Core (YoY) (APR)

1.4%

1.4%

Sticky inflation paired with the ongoing improvement in the labor market may encourage the FOMC to soft its dovish tone for monetary policy, and the fresh developments coming out of the central bank may generate a bullish outlook for the dollar should we see a greater dissent within the committee.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Housing Starts (MoM) (MAY)

-3.9%

-6.5%

Pending Home Sales (APR)

1.0%

0.4%

Gross Domestic Product (Annualized) (QoQ) (1Q P)

-0.5%

-1.0%

However, the slowdown in the housing market along with the dismal 1Q GDP reading may push the FOMC to lower its fundamental projections for the U.S. economy, and the updated forecasts may heighten the bearish sentiment surrounding the greenback should the calculations drag on interest rate expectations.

How To Trade This Event Risk(Video)

For LIVE SSI Updates Ahead of the FOMC Meeting, Join DailyFX on Demand

BullishUSD Trade: FOMC Cuts Another $10B & Shows Greater Willingness to Normalize

  • Need red, five-minute candle following the release to consider a short EUR/USD trade
  • If market reaction favors a long dollar trade, short EUR/USD 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 Continues to Highlight Dovish Tone for Monetary Policy

  • Need green, five-minute candle to favor a long EUR/USD trade
  • Implement same setup as the bullish dollar trade, just in opposite direction

Potential Price Targets For The Rate Decision

EUR/USD Daily

EUR/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • Sideways Price Action in Focus as EUR/USD Holds Monthly Range
  • Interim Resistance: 1.3650 (78.6% expansion) to 1.3670 (61.8% retracement)
  • Interim Support: 1.3490 (50.0% retracement to 1.3500 Pivot

Read More:

GBP/AUD Breaks Out- Topside Targets Favored on BoE Dissent

GBPNZD Weekly Opening Range Play- 1.96 Resistance in Focus

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)

APR 2014

04/30/2014 18:00 GMT

0.25%

0.25%

+9

+2

April 2014 Federal Open Market Committee Interest Rate Decision

EUR/USD Chart

As expected, the Federal Reserve cut its asset purchase program by $10B in April leaving the total monthly purchase total to $45B per month, but pledged to keep rates on stay on hold for a considerable period of time even after its quantitative-easing (QE) program comes to an end. The relatively dovish tone for monetary policy dragged on the greenback, with the EUR/USD spiking to a high of 1.3875, but the market reaction was short-loved as the pair ended the day at 1.3864.

--- 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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