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EUR/USD Weakness to Persist on Hawkish 2016 FOMC

EUR/USD Weakness to Persist on Hawkish 2016 FOMC

2016-01-27 16:35:00
David Song, Shuyang Ren,
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- Federal Open Market Committee (FOMC) Widely Expected to Retain Current Policy.

- Will the Fed Retain Its Pledge to Further Normalize Monetary Policy 2016?

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

According to a Bloomberg News survey, all of the 104 economists polled forecast the Federal Open Market Committee (FOMC) to keep the benchmark interest rate on hold at 0.50%, but the bullish sentiment surrounding the U.S. dollar may gather pace throughout 2016 should Chair Janet Yellen pledge to further normalize monetary policy over the coming months.

2016 rotation may .

What’s Expected:

EUR/USD FOMC

Click Here for the DailyFX Calendar

Why Is This Event Important:However, with the 2016 rotation, market participants may pay increased attention to the new voting-members as St. Louis Fed President James Bullard, a central bank hawk, adopts a more cautious tone, and a material shift in the policy statement may dampen the appeal of the dollar as it weighs on interest rate expectations.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Consumer Confidence (JAN)

96.5

98.1

Consumer Price Index ex. Food & Energy (YoY) (DEC)

2.1%

2.1%

Non-Farm Payrolls (DEC)

200K

292K

Improved confidence accompanied by sticky price growth may encourage the Fed to implement higher borrowing costs in the months ahead, and the fresh batch of central bank rhetoric may foster a near-term advance in the greenback should the committee put an increased emphasis on its next interest rate decision on March 16.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Advance Retail Sales (MoM) (DEC)

-0.1%

-0.1%

Average Hourly Earnings (YoY) (DEC)

2.7%

2.5%

ISM Manufacturing (DEC)

49.0

48.2

However, slowing outputs paired with subdued wages may push Fed officials to endorse a wait-and-see approach, and the reserve currency stand at risk of facing near-term headwinds should the 2016 committee change its tune and highlight a greater downside risks to its economic outlook.

Join DailyFX on Demandto Cover the Entire FOMC Interest Rate Decision!

How To Trade This Event Risk(Video)

Bullish USD Trade: Fed Stays on Course to Further Normalize Policy 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 Talks Down Bets for Higher Borrowing-Costs

  • 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

EURUSD Daily

EUR/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • The diverging paths for monetary policy casts a long-term bearish outlook for EUR/USD especially as the European Central Bank (ECB) keeps the door open to further embark on its easing cycle, with the pair at risk of giving back the rebound from earlier this month as price & the Relative Strength Index (RSI) retain the bearish formations carried over from December.
  • The DailyFX Speculative Sentiment Index (SSI) shows retail crowd has flipped net-short EUR/USD earlier this week on January 25, with the ratio falling towards near-term extremes as it slips to -1.33 (66% of traders are currently 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)

Avoid the pitfalls of trading by steering clear of classic mistakes. Review these principles in the "Traits of Successful Traders" series.

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)

DEC

2015

12/16/2015 18:00 GMT

0.50%

0.50%

+33

-36

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

EUR/USD Chart

The Federal Open Market Committee (FOMC) finally removed the zero-interest rate policy (ZIRP), with the central bank voting unanimously to lift the benchmark interest rate by 25 basis points to 0.50%. Even though the central bank remains ‘data dependent,’ it seems as though the Fed will stay on course to implement higher borrowing-costs in 2016 as Chair Janet Yellen remains confident in achieving the 2% inflation goal over the policy horizon. The initial market reaction was largely mixed, with EUR/USD briefly climbing above the 1.1000 handle, but the move was short-lived as the pair ended the day at 1.0908.

Read More:

USD/CAD: Just a Minor Setback?

Oil Collapse Driven by Panic; Is CAD at a Policy Turning Point?

WTI Crude Oil Price Forecast: Largest 2-Day Rally since 2008 Lacks Follow through (Levels)

COT-Trend Traders Hold Record Net Short Position in Copper

--- 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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