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FOMC to Echo 2015 Rate Path; USD to Take Cues from Fresh Projections

FOMC to Echo 2015 Rate Path; USD to Take Cues from Fresh Projections

David Song, Strategist

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

- Will Fed Officials Curb Their Growth, Inflation and Interest-Rate Forecasts?

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

Trading the News: Federal Open Market Committee Interest Rate Decision

Even though the Federal Open Market Committee (FOMC) is expected to remain on the sidelines in September, the fresh batch of central bank rhetoric may foster a near-term sell-off in EUR/USD should the central bank prepare U.S. household and businesses for a late-2016 rate-hike.

What’s Expected:

DailyFX Calendar

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Why Is This Event Important:With Fed Funds Futures highlighting a 60% probability for a December rate-hike, the policy statement may boost the appeal of the greenback and reveal a growing dissent within the committee as the central bank appears to be following a similar course to 2015. However, a downward revision in the updated projections (growth, inflation as well as the interest rate dot-plot) is likely to produce headwinds for the greenback as Chair Janet Yellen continues to endorse a ‘gradual’ path in normalizing monetary policy.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

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

2.2%

2.3%

Pending Home Sales (MoM) (JUL)

0.7%

1.3%

New Home Sales (MoM) (JUL)

-2.0%

12.4%

Signs of sticky price growth accompanied by the ongoing expansion in the housing market may push the FOMC to endorse a December rate-hike, and the central bank may largely retain its projections for higher borrowing-costs in 2017 especially as the economy approaches ‘full-employment.’

Risk: Bearish Argument/Scenario

Release

Expected

Actual

U. of Michigan (SEP P)

90.6

89.8

Advance Retail Sales (MoM) (AUG)

-0.1%

-0.3%

Average Hourly Earnings (YoY) (YoY)

2.5%

2.4%

Nevertheless, subdued wage growth paired with waning household confidence may push Chair Yellen to further delay the normalization cycle, and the dollar stands at risk of facing a bearish market reaction should central bank officials curb their projections for growth, inflation and interest rates.

How To Trade This Event Risk(Video)

Bullish USD Trade: FOMC Promotes December-Hike, Warns of Higher Rates in 2017

  • Need red, five-minute candle following the fresh updates 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 Officials Lower Economic Forecasts

  • 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
  • The near-term wedge/triangle in EUR/USD may give way as price approaches the apex, with the broader outlook still constructive as the Relative Strength Index (RSI) preserves the bullish formation carried over from the end of last year. Need a break of near-term support around 1.1110 (50% retracement) to favor a bearish outlook for EUR/USD, with the next downside region of interest coming in around 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)

Check out the short-term technical levels that matter for USD/JPY heading into the report!

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)

JUL

2016

07/27/2016 18:00 GMT

0.50%

0.50%

+48

+60

July 2016 Federal Open Market Committee (FOMC) Rate Decision

EUR/USD 5-Minute

EUR/USD Chart

The Federal Open Market Committee (FOMC) voted 9 to 1 to preserve the current policy in July, with Kansas City Fed President Esther George pushing for 25bp rate-hike as ‘the Committee risked eroding the credibility of its policy communications.’ The recent comments suggest the Fed remains in no rush to implement higher borrowing-costs as ‘the risks to the projection for inflation were still judged as weighted to the downside, reflecting the possibility that longer-term inflation expectations may have edged lower,’ and Chair Janet Yellen may continue to endorse a wait-and-see approach at the next quarterly meeting in September as ‘most survey-based measures of longer-run inflation expectations were little changed, on balance, while market-based measures of inflation compensation remained low.’ Despite the limited initial response, the greenback struggled to hold its ground following more of the same from the FOMC, with EUR/USD climbing above the 1.1000 handle to end the day at 1.1056.

Get our top trading opportunities of 2016 HERE

Read More:

S&P 500 Tech Update: Looking to Short-term Chart for Direction

Silver Prices: Triangle Morphs into Larger Version of Itself, Wait for the Break

Few US Data Pre-FOMC Keeps Markets on Edge

Weekly Trading Forecast: Fed and BoJ Rate Decisions, Brexit Fears Carry More than Currency Risks

--- 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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