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EUR/USD Risks Larger Recovery on Wait-and-See FOMC

EUR/USD Risks Larger Recovery on Wait-and-See FOMC

2016-07-27 12:55:00
David Song, Strategist
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- Federal Open Market Committee (FOMC) Widely Anticipated to Preserve Current Policy.

- Will There Be Another Unanimous Vote to Further Delay the Normalization Cycle?

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Trading the News: Federal Open Market Committee Interest Rate Decision

Another unanimous vote by the Federal Open Market Committee (FOMC) to retain the current policy may dampen the appeal of the greenback and spark a near-term advance in EUR/USD as market participants push out bets for the next rate-hike.

What’s Expected:

DailyFX Calendar

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Why Is This Event Important:With Fed Funds Futures reflecting limited expectations for higher borrowing-costs in 2016, Chair Janet Yellen and Co. may largely endorse a wait-and-see approach for monetary policy as the central bank argues market-based measures of inflation compensation remains weak while ‘most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

U. of Michigan Confidence (JUL P)

93.5

89.5

Average Hourly Earnings (YoY) (JUN)

2.7%

2.6%

Personal Income (MAY)

0.3%

0.2%

Subdued wage growth paired with the downtick in household confidence may press the FOMC to further delay its normalization cycle, and more of the same from the central bank may produce headwinds for the greenback as interest-rate expectations falter.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

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

2.2%

2.3%

Advance Retail Sales (MoM) (JUN)

0.1%

0.6%

Non-Farm Payrolls (JUN)

180K

287K

However, sticky prices accompanied by the pickup in private-sector consumption may spur a split decision to retain the current policy, and a growing rift within the central bank may fuel expectations for a 2016 rate-hike as the Fed runs the risk of overshooting the 2% inflation-target over the policy horizon.

How To Trade This Event Risk(Video)

Bearish USD Trade: FOMC Votes Unanimously to Keep Status Quo

  • Need green, five-minute candle following the rate decision 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: Increased Number of Fed Officials Dissent

  • 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.

Potential Price Targets For The Release

EURUSD Daily

EUR/USD Daily Chart
  • The diverging paths for monetary policy continues to cast a long-term bearish outlook for EUR/USD, but the pair may mount a larger recovery over the days ahead amid the string of failed attempts to close below 1.0960 (23.6% retracement) to 1.0970 (38.2% retracement).
  • Key Resistance: 1.1760 (61.8% retracement) to 1.1810 (38.2% retracement)
  • Key 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 the FOMC interest 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)

JUN

2016

06/15/2016 18:00 GMT

0.50%

0.50%

+7

+7

June 2016 Federal Open Market Committee (FOMC) Rate Decision

EUR/USD 5-Minute

EUR/USD Chart

The Federal Open Market Committee (FOMC) voted unanimously to retain its current policy in June as the central bank trimmed its growth forecasts for 2016 and 2017. Nevertheless, Fed officials continued to project two rate-hikes for 2016 as the committee anticipates to achieve the 2% target for inflation over the policy horizon, but Fed Chair Janet Yellen may look to further delay the normalization cycle amid the weakening outlook for the global economy. The greenback edged lower following the rate decision, with EUR/USD coming off of the 1.1250 region to end the day at 1.1259.

Get our top trading opportunities of 2016 HERE

Read More:

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COT-British Pound Ownership Profile Warns of a Bottom

Post-Brexit NZDUSD Support Vulnerable to Weak NZ Trade Balance

USD/JPY July Recovery at Risk on Wait-and-See FOMC/BoJ Policy

--- Written by David Song, Currency Analyst

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.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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