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EUR/USD Tests for Trendline Support Ahead of FOMC Minutes

EUR/USD Tests for Trendline Support Ahead of FOMC Minutes

2016-10-12 08:00:00
David Song, Strategist
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- Federal Open Market Committee (FOMC) Voted 7 to 3 to Retain Current Policy in September.

- Will the FOMC Minutes Boost Bets For December Rate-Hike?

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

Trading the News: Federal Open Market Committee (FOMC) Minutes

Market participants may closely watch the Federal Open Market Committee (FOMC) Minutes amid the growing dissent within the central bank, but the fresh rhetoric from the 2016-voting members (New York Fed President William Dudley and Kansas City Fed President Esther George) may have a more material impact on the U.S. dollar outlook as the board appears to be following a similar path to 2015.

What’s Expected:

DailyFX Calendar

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Why Is This Event Important:

The FOMC Minutes may produce a rather limited market reaction as the permanent voting-members remain on the sidelines, but the near-term strength in the greenback may gather pace over the days ahead should the central bank show a more collective approach in preparing U.S. households and businesses for a 2016 rate-hike. Looking ahead, the monetary policy guidance for 2017 may undermine the bullish sentiment surrounding the dollar as Fed officials scale back their long-run interest rate forecast, and the reserve currency stands at risk of facing headwinds going into the end of the year should the central bank endorse a more ‘gradual’ path in normalizing monetary policy.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Average Hourly Earnings (YoY) (SEP)

2.6%

2.6%

Personal Consumption Expenditure Core (YoY) (AUG)

1.7%

1.7%

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

2.2%

2.3%

Signs of stronger wage growth accompanied by sticky price growth may encourage the central bank to talk up market expectations for a rate-hike, and an upbeat policy statement may spur a bullish reaction in the dollar as it fuels speculation for a year-end rate-hike.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Personal Spending (AUG)

0.1%

0.0%

Housing Starts (MoM) (AUG)

-1.7%

-5.8%

Advance Retail Sales (AUG)

-0.1%

-0.3%

However, the weakening outlook for private-sector consumption may push the FOMC to further delay its normalization cycle, and ongoing concerns surrounding the inflation-outlook may keep the central bank on the sidelines as Chair Janet Yellen appears to be in no rush to implement higher borrowing-costs.

How To Trade This Event Risk(Video)

Bullish USD Trade: FOMC Minutes Boosts Bets for December Rate-Hike

  • Need red, five-minute candle following the release to consider a short EUR/USD position.
  • If market reaction favors a bullish dollar trade, short EUR/USD with two separate position.
  • Set stop at the near-by swing high/reasonable distance from entry; look for at least 1:1 risk-to-reward.
  • Move stop to entry on remaining position once initial target is hit; set reasonable limit.

Bearish USD Trade: Fed Officials Endorse Wait-and-See Approach

  • Need green, five-minute candle to favor a long EUR/USD trade.
  • Implement same setup as the bullish dollar trade, just in reverse.

Potential Price Targets For The Release

EUR/USD Daily

EUR/USD Daily Chart

Chart - Created Using Trading View

  • EUR/USD is coming up against a key juncture as it approaches the ascending trendline from earlier this year, with a break of the bullish formation raising the risk for a move back towards the July low (1.0952) especially as the Relative Strength Index (RSI) highlights a similar dynamic.
  • Interim Resistance: 1.1420 (23.6% retracement) to 1.1428 (June high)
  • Interim Support: 1.0912 (June low) to 1.0940 (61.8% retracement)

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

Impact that the FOMC Minuteshas had on EUR/USD during the previous release

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

JUL

2016

08/17/2016 18:00 GMT

--

--

+19

+21

July 2016 Federal Open Market Committee (FOMC) Minutes

EUR/USD 5-Minute

EUR/USD Chart

The Federal Open Market Committee (FOMC) Minutes failed to boost bets for an imminent rate-hike as the central bank continued to warn ‘market-based measures of inflation compensation remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months,’ but Kansas City Fed President Esther George may continue to push for a rate-hike throughout the remainder of the year as the ‘committee risked eroding the credibility of its policy communications’ especially as the U.S. economy approaches ‘full-employment.’ A further improvement in labor market dynamics may spur a growing dissent within the FOMC as the central bank continues to see a ‘moderate’ recovery, but Fed officials may endorse a more ‘gradual’ path in normalizing monetary policy as they struggle to achieve the 2% target for inflation. The dollar struggled to hold its ground following more of the same from the FOMC, with EUR/USD rebounding off of 1.1240 to end the day at 1.1284.

Get our top trading opportunities of 2016 HERE

Read More:

COT-Extreme Changes in Gold and Crude Positioning

USD/CAD Technical Analysis: With Oil Above $50, Could Loonie Liftoff?

Market Move Approaching: S&P 500, Nasdaq 100 & Dow in View

USD/CAD Plunges as Russia Signals Readiness to Cap Oil Production

--- Written by David Song, Currency Analyst

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

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

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