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EUR/USD Rebound Vulnerable to Hawkish FOMC Forward- Guidance

EUR/USD Rebound Vulnerable to Hawkish FOMC Forward- Guidance

David Song, Shuyang Ren,

- Federal Open Market Committee (FOMC) Expected to Drop ‘Patience’ Language.

- Will the Fed Alter Its Growth, Inflation and Interest Rate Projections?

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

The Federal Open Market Committee (FOMC) interest rate decision may heighten the bullish sentiment surrounding the greenback and spark a further decline in EUR/USD should the central bank implement a more hawkish twist to the forward-guidance for monetary policy.

What’s Expected:

EUR/USD FOMC

Click Here for the DailyFX Calendar

Why Is This Event Important:Despite expectations of seeing the Fed drop the ‘patience’ phrase, the fresh updates (growth, inflation and interest rate dot-plot) coming out of the central bank may highlight the risk for a further delay in the normalization cycle should Chair Janet Yellen largely use the press conference on talk down interest rate expectations.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Non-Farm Payrolls (FEB)

235K

295K

ISM Non-Manufacturing (FEB)

56.5

56.9

Gross Domestic Product (Annualized) (QoQ) (4Q P)

2.0%

2.2%

The pickup in job growth paired with the expansion in private-sector activity may encourage the FOMC to show a greater willingness to remove the zero-interest rate policy (ZIRP) in mid-2015, and a hawkish policy statement may trigger fresh lows in EUR/USD amid the growing deviation in the policy outlook.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

U. of Michigan Confidence (MAR P)

95.5

91.2

Advance Retail Sales (MoM) (FEB)

0.3%

-0.6%

Average Hourly Earnings (YoY) (FEB)

2.2%

2.0%

However, the weakness in household earnings along with the ongoing contraction in retail spending may push the Fed endorse a wait-and-see approach, and the dollar may face a larger correction in the days ahead should we get more of the same from Janet Yellen and Co.

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

How To Trade This Event Risk(Video)

Bullish USD Trade: FOMC Implements Hawkish Twist to Forward-Guidance

  • Need red, five-minute candle following the policy statement to consider a short EUR/USD position
  • If market reaction favors a bullish dollar trade, sell 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

Bearish USD Trade: Committee Looks to Retain ZIRP for Extended Time

  • 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:

GBPCAD at Support- Scalps Target 1.8785 Ahead of Key Data

COT-Largest Commercial Hedger Long Position in AUD on Record

Potential Price Targets For The Release

EUR/USD Daily Chart

EUR/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • Despite the oversold RSI signal, EUR/USD remains at risk for a further decline as long as the oscillator holds below 30.
  • Interim Resistance: 1.0800 (50% expansion) to 1.0850 (78.6% expansion)
  • Interim Support: 1.0375 (78.6% expansion) to 1.0400 pivot

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)

JAN

2015

01/28/2014 19:00 GMT

0.25%

0.25%

-24

-49

January 2015 Federal Open Market Committee (FOMC) Interest Rate Decision

EUR/USD Chart

As expected, the Federal Open Market Committee (FOMC) retained its current policy in January and went onto say that the central bank remains “patient” in normalizing the monetary policy in an effort to combat the disinflationary environment. Despite the wait-and-see approach, it seems as though the Fed may stay on course to raise the benchmark interest rate in mid-2015 as Chair Janet Yellen remains confident in achieving the 2% inflation target over the policy horizon. The dollar struggled to hold its ground as we got more of the same from the Fed, with EUR/USD slipping below the 1.1300 handle to end the day at 1.1268.

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

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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