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FOMC Forward-Guidance in Focus; EUR/USD Vulnerable to Less-Dovish Fed

FOMC Forward-Guidance in Focus; EUR/USD Vulnerable to Less-Dovish Fed

David Song, Strategist

- Federal Open Market Committee (FOMC) Widely Expected to Deliver Another $10B Taper

- Will We See a Greater Dissent as the Fed Sees QE Ending in October?

Trading the News: Federal Open Market Committee (FOMC) Interest Rate Decision

The Federal Open Market Committee (FOMC) interest rate decision may spur a bearish reaction in the dollar (bullish EUR/USD) should we get more of the same and see another unanimous vote to retain the highly accommodative policy stance.

What’s Expected:

EUR/USD FOMC

Click Here for the DailyFX Calendar

Why Is This Event Important:Even though the Fed is widely expected to conclude its asset-purchase program in October, the forward-guidance for monetary policy may play a greater role in driving USD price action as market participants still see the first rate hike in 2015.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Consumer Price Index (YoY) (JUN)

2.1%

2.1%

Producer Price Index ex Food & Energy (YoY) (JUN)

1.7%

1.8%

Average Hourly Earnings (YoY) (JUN)

1.9%

2.0%

The Fed may sound more neutral this time around amid sticky inflation paired with the uptick in wage growth, and we may see a bullish reaction in the USD should the fresh batch of central bank rhetoric boost interest rate expectations.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Pending Home Sales (MoM) (JUN)

0.5%

-1.1%

New Home Sales (MoM) (JUN)

-5.8%

-8.1%

Housing Starts (MoM) (JUN)

1.9%

-9.3%

Nevertheless, we may get more of the same from the Fed amid the ongoing slack in the real economy, and the dollar may face another downturn over the near-term as Chair Janet Yellen remains reluctant to move away from the zero-interest rate policy (ZIRP). Join DailyFX on Demand to Cover the Entire FOMC Rate Decision!

How To Trade This Event Risk(Video)

Bullish USD Trade: Statement Shows Dissent & Greater Willingness to Normalize Policy

  • Need red, five-minute candle following the policy statement to consider a short EUR/USD position
  • If market reaction favors a long dollar trade, sell EUR/USD with two separate position
  • Set stop at the near-by swing high/reasonable distance from cost; at least 1:1 risk-to-reward
  • Move stop to entry on remaining position once initial target is met, set reasonable limit

Bearish USD Trade: FOMC Retains Dovish Forward-Guidance

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

Read More:

Price & Time: The Coiled Spring

These Three Factors Favor Continued British Pound Weakness

Potential Price Targets For The Release

EUR/USD Daily

EUR/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • Remains at Risk for Further Losses as Long as RSI Holds Below 30
  • Interim Resistance: 1.3770 (38.2% expansion) to 1.3780 (38.2% retracement)
  • Interim Support: 1.3300 Pivot to 1.3310 (78.6% expansion)

Impact that the FOMC rate decision has had on EUR/USD during the last meeting

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

JUN 2014

06/18/2014 18:00 GMT

0.25%

0.25%

-12

+19

June 2014 Federal Open Market Committee (FOMC) Interest Rate Decision

FOMC Forward-Guidance in Focus; EUR/USD Vulnerable to Less-Dovish Fed

The Federal Open Market Committee (FOMC) reduced its asset-purchase program by another $10B in June, but retained the dovish forward-guidance for monetary policy as the central bank reiterated that the benchmark interest rate is likely to stay low for a considerable period of time even after the Fed halts the quantitative easing program. The initial reaction to the FOMC interest rate decision was short-lived as the EUR/USD failed to hold below the 1.3550 region, and the greenback lost ground during the remainder of the North American trade as the pair closed at 1.3594.

--- 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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