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Post-ECB EUR/USD Rally to Benefit from Dovish Fed Rate-Hike

Post-ECB EUR/USD Rally to Benefit from Dovish Fed Rate-Hike

David Song, Shuyang Ren,

- Federal Open Market Committee (FOMC) Widely Expected to Remove Zero-Interest Rate Policy (ZIRP).

- Will There Be a Unanimous Vote to Implement Higher Borrowing-Costs?

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

Based on Fed Funds Futures, market participants are pricing a 76% probability for a rate-hike a the Federal Open Market Committee’s (FOMC) December 16 interest rate decision, and the fresh updates coming out of the central bank may instill a bullish U.S. dollar outlook for 2016 should Chair Janet and Co. outline a more detailed exit-strategy.

What’s Expected:

EUR/USD FOMC Rate Decision

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Why Is This Event Important:Even though the FOMC remains on course to shift gears, a split decision to implement higher borrowing-costs accompanied by a downward revision in the central bank’s updated forecasts may drag on rate expectations, and the dollar stands at risk of facing near-term headwinds over the remainder of the month should the ‘data dependent’ Fed highlight a wait-and-see approach for the year ahead.

Expectations: Bullish Argument/Scenario

Consumer Price Index ex. Food & Energy (YoY) (NOV)2.0%2.0%
Non-Farm Payrolls (NOV)200K211K
ADP Employment Change (NOV)190K217K

With the U.S. economy approaching ‘full-employment,’ Fed officials may sound increasingly upbeat and endorse a more hawkish outlook for monetary policy as Chair Yellen remains confident in achieving the 2% inflation target over the policy horizon.

Risk: Bearish Argument/Scenario

Real Average Weekly Earnings (YoY) (NOV)--1.6%
Advance Retail Sales (MoM) (NOV)0.3%0.2%
Average Hourly Earnings (YoY) (NOV)2.3%2.3%

However, subdued wage growth paired with the ongoing weakness in household consumption may push the FOMC to temper market expectations, and the greenback may struggle to hold its ground should the committee outline a more shallow path for interest rates.

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

How To Trade This Event Risk(Video)

Bullish USD Trade: Fed Lifts Benchmark Interest Rate, Warns of Higher Borrowing-Costs in 2016

  • Need red, five-minute candle following the rate decision 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 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 Implements ‘Dovish’ Rate-Hike, Endorses Wait-and-See Approach

  • 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.

Potential Price Targets For The Release


EUR/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • Despite bets for the first Fed rate-hike in nearly a decade, the near-term rally in EUR/USD following the European Central Bank (ECB) interest rate decision may gather pace in the days ahead especially as the Relative Strength Index (RSI) appears to be breaking out of the bearish formation carried over from back in August.
  • DailyFX Speculative Sentiment Index (SSI) shows the retail crowd remains net-short since December 3, but the ratio has come off of the recent extremes as it narrows to -1.23, with 45% of traders now long..
  • Interim Resistance: 1.1052 (November high) to 1.1090 (50% retracement)
  • Interim Support: Interim Support: 1.0380 (78.6% expansion) to 1.0410 (61.8% expansion)

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

PeriodData ReleasedEstimateActualPips ChangePips Change



10/28/2015 18:00 GMT0.25%0.25%-165-144

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

The Federal Open Market Committee (FOMC) once again voted 9-1 to retain its current policy in October, with Richmond Fed President Jeffrey Lacker dissenting against the majority to raise the benchmark interest rate. Nevertheless, it seems as though the Fed may stay on course to remove the zero-interest rate policy (ZIRP) in 2015 as the U.S. economy approaches ‘full-employment,’ while Chair Janet Yellen remains confident in achieving the 2% inflation target over the policy horizon. The greenback strengthened following the rate decision, with EUR/USD dipping below the 1.1000 handle to end the North American trade at 1.0921.

*As we approach the holidays and thus illiquid markets, it's worth reviewing principles that help protect your capital. We call these principles the "Traits of Successful Traders."

Three Factors Warn of Perfect Storm in FX Markets - Caution Advised

Read More:

Price & Time: S&P 500: Transparency Run Amok?

Trade Setups in USD-pairs Ahead of FOMC

Price & Time: USD/CAD – Pitchfork Extravaganza

US DOLLAR Technical Analysis: The 100-DMA Acts As a Bullish Support

--- Written by David Song, Currency Analyst

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

To be added to David's e-mail distribution list, please follow this link.

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