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EUR/USD Continuation Pattern at Risk on Upbeat FOMC

EUR/USD Continuation Pattern at Risk on Upbeat FOMC

David Song, Shuyang Ren,

- Federal Open Market Committee (FOMC) Widely Anticipated to Preserve Current Policy.

- Will the Fed’s Updated Forecast Fuel Speculation for Rate-Hikes in 2016?

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

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

Even though the Federal Open Market Committee (FOMC) is widely expected to retain its current policy in March, the updated forecasts for growth, inflation and the interest rate may instill a bullish outlook for the U.S. dollar should the central bank stay on course to implement higher borrowing-costs in 2016.

What’s Expected:

EUR/USD FOMC

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Why Is This Event Important:The FOMC may continue to prepare U.S. households and businesses for higher interest rates especially as the economy approaches ‘full-employment,’ and the central bank may sound more hawkish this time around as Chair Janet Yellen remains confident in achieving the 2% inflation-target over the policy horizon.

Expectations: Bullish Argument/Scenario

ReleaseExpectedActual
Non-Farm Payrolls (FEB)195K242K
Labor Force Participation Rate (FEB)62.8%62.9%
Gross Domestic Product (Annualized) (QoQ) (4Q P)0.4%1.0%

The ongoing improvement in labor-market dynamics accompanied by signs of a stronger-than-expected recovery may encourage the FOMC to further normalize monetary policy in 2016, and the fresh batch of central bank rhetoric may heighten the appeal of the greenback should Fed officials endorse an upbeat outlook for the U.S. economy.

Risk: Bearish Argument/Scenario

ReleaseExpectedActual
Consumer Credit (JAN)$17.000B$10.538B
Average Hourly Earnings (YoY) (FEB)2.5%2.2%
Consumer Confidence (FEB)97.292.2

However, waning confidence paired with subdued wage growth may prompt to Fed to adopt a more cautious tone this time around, and the dollar stands at risk of facing near-term headwinds should the central bank show a greater willingness to further delay the normalization cycle.

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How To Trade This Event Risk(Video)

Bullish USD Trade: FOMC to Stay 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: Fed Curbs Expectations 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

  • Indeed, the diverging paths for monetary policy fosters a long-term bearish outlook for EUR/USD especially as the European Central Bank (ECB) continues to push monetary policy into uncharted territory, but the pair appears to be carving out a bullish-flag formation (continuation pattern) as it holds above the range from earlier this month.
  • Interim Resistance: 1.1510 (50% retracement) to 1.1520 (61.8% expansion)
  • Interim Support: Interim Support: 1.0380 (78.6% expansion) to 1.0410 (61.8% expansion)

Check out the short-term technical levels that matter for USDOLLLAR heading into the Fed meeting!

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

PeriodData ReleasedEstimateActualPips ChangePips Change

JAN

2016

01/27/2016 18:00 GMT0.50%0.50%+35+23

January 2016 Federal Open Market Committee (FOMC) Interest Rate Decision

EUR/USD Chart

The Federal Open Market Committee (FOMC) stuck to its current policy and kept the benchmark rate unchanged at 0.50% following the rate-hike in December. After raising borrowing-costs for the first time since 2006, the Fed may continue to normalize monetary policy over the coming months as the economy approaches ‘full-employment,’ while Chair Janet Yellen anticipates a ‘consumer-led’ recovery in 2016. The market reaction to the interest rate decision was largely mixed as the central bank adopts wait-and-see approach, with EUR/USD struggling to hold above the 1.0900 handle as the pair ended the day at 1.0892.

Read More:

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Long Term Cyclical Influence Nears for AUD/USD

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DailyFX Technical Focus: Nikkei 225 at Resistance

Get our top trading opportunities of 2016 HERE

--- 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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