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EUR/USD Risks Larger Rebound If FOMC Retains Dovish Forward-Guidance

EUR/USD Risks Larger Rebound If FOMC Retains Dovish Forward-Guidance

2014-09-17 09:00:00
David Song, Shuyang Ren,
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- Federal Open Market Committee (FOMC) Widely Expected to Deliver Another $10B Taper

- Will There Be a Larger Dissent as the Fed Looks to End QE in October?

For more updates, sign up for David's e-mail distribution list.

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) if the central bank remains reluctant to move away from the zero-interest rate policy (ZIRP).

What’s Expected:

EUR/USD Risks Larger Rebound If FOMC Retains Dovish Forward-GuidanceEUR/USD Risks Larger Rebound If FOMC Retains Dovish Forward-GuidanceEUR/USD FOMC

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Why Is This Event Important:Even though the Fed is widely expected to conclude its asset-purchase program at the October 29 meeting, we would need a more hawkish twist to the forward-guidance for monetary policy to favor further USD strength.

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

Non-Farm Payrolls (AUG)

230K

142K

New Home Sales (MoM) (JUN)

-5.8%

-8.1%

Housing Starts (MoM) (JUN)

1.9%

-9.3%

The dollar may come under pressure should we get more of the same from the Fed, and the greenback may face a larger correction over the remainder of the month should Chair Janet Yellen see greater scope to retain the highly accommodative policy stance for an extended period of time.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

Average Hourly Earnings (YoY) (AUG)

2.1%

2.1%

Personal Consumption Expenditure Core (YoY) (JUL)

1.5%

1.5%

Consumer Price Index ex Food and Energy (YoY) (JUL)

1.9%

1.9%

Nevertheless, sticky inflation paired with the uptick in wage growth may spur a greater dissent within the committee and push the FOMC to lay out a more detailed exit strategy as the central bank looks to move away from its easing cycle.

Join DailyFX on Demand to Cover the Entire FOMC Rate Decision!

How To Trade This Event Risk(Video)

Bearish USD Trade: FOMC Remains Reluctant to Normalize Monetary Policy

  • Need green, five-minute candle following the policy statement to consider a long EUR/USD position
  • If market reaction favors a bearish dollar trade, buy EUR/USD with two separate position
  • Set stop at the near-by swing low/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

Bullish USD Trade: Policy Statement Shows Larger Dissent & Shift Away from ZIRP

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

Read More:

Price & Time: Gold Exhaustion Near?

GBP Remains Vulnerable- USD/CAD Risks Larger Correction on Upbeat BoC

Potential Price Targets For The Release

EUR/USD Daily

EUR/USD Daily

Chart - Created Using FXCM Marketscope 2.0

  • Risks Larger Topside Correction as the Relative Strength Index (RSI) Threatens Bearish Momentum
  • Interim Resistance: 1.2990 (23.6% retracement) to 1.3025 (23.6% expansion)
  • Interim Support: 1.2858 (Monthly low) to 1.2870 (50.% 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)

JUL 2014

07/30/2014 18:00 GMT

0.25%

0.25%

+14

+20

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

EUR/USD Chart

The Federal Open Market Committee (FOMC) voted to reduce its asset-purchase pace to $25B from $35B in July amid the sharp economic rebound in the second quarter. However, the Fed also highlighted the significant underutilization of labor resources and reiterated that it is appropriate to maintain the current fed fund rate for a considerable period of time even after the quantitative easing program ends. The Fed’s dovish tone dragged on the greenback, with EUR/USD climbing above 1.3400, but we saw limited follow-through behind the initial reaction as the pair ended the day at 1.3395.

--- Written by David Song, Currency Analyst and Shuyang Ren

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

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