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Greater Dissent Within FOMC to Thwart EUR/USD Recovery

Greater Dissent Within FOMC to Thwart EUR/USD Recovery

2016-11-02 12:30:00
David Song, Strategist
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- Federal Open Market Committee (FOMC) Expected to Preserve Current Policy.

- Will the Permanent Voting-Members Continue to Endorse a Wait-and-See Approach?

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Trading the News: Federal Open Market Committee Interest Rate Decision

The Federal Open Market Committee (FOMC) is widely expected to keep the benchmark interest rate on hold in November, but a growing dissent within the central bank may heighten the appeal of the greenback and spark a near-term pullback in EUR/USD as it fuels bets for an imminent rate-hike.

What’s Expected:

DailyFX Calendar

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Why Is This Event Important:

The FOMC appears to be following a similar path to 2015 as central bank officials boost their efforts in preparing U.S. households and businesses for higher borrowing-costs, and the dollar may stage a near-term rally following the rate-decision should the fresh developments fuel expectations for a December rate-hike. However, another 7 to 3 split may undermine the bullish sentiment surrounding the greenback as the permanent voting-members remain in no rush to further normalize monetary policy, and more of the same from the committee may spark a bearish reaction in the dollar as it drags on interest-rate expectations.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Personal Consumption Expenditure- Core (YoY) (SEP)

1.7%

1.7%

Gross Domestic Product (Annualized) (QoQ) (3Q A)

2.6%

1.4%

Average Hourly Earnings (YoY) (SEP)

2.6%

2.6%

Signs of sticky price growth paired with the pickup in economic activity may spur a greater dissent within the FOMC, and the near-term rebound in EUR/USD may unravel over the days ahead should the fresh batch of central bank rhetoric fuel expectations for an imminent rate-hike.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Consumer Confidence (OCT)

101.5

98.6

NFIB Small Business Confidence (SEP)

95.0

94.1

Non-Farm Payrolls (SEP)

172K

156K

However, waning confidence accompanied by the slowdown in job-growth may push the Federal Reserve to buy more time, and more of the same from Chair Janet Yellen and Co. may trigger a bearish reaction in the greenback as it drags on the interest-rate outlook.

How To Trade This Event Risk(Video)

Bullish USD Trade: Fed Officials Show Greater Willingness for December Rate-Hike

  • 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: FOMC Votes 7 to 3 to Preserve Current Policy

  • 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

EUR/USD Daily

EUR/USD Daily Chart

Chart - Created Using Trading View

  • Broader outlook for EUR/USD remains tilted to the downside as the exchange rate preserves the descending trend carried over from the end of August, but a move back above the former support zone around 1.1090 (50% retracement) to 1.1110 (50% retracement) may spur a test of trendline resistance especially as the Relative Strength Index (RSI) fails to preserve the bearish formation carried over from the same period.
  • Interim Resistance: 1.1090 (50% retracement) to 1.1110 (50% retracement)
  • Interim Support: 1.0780 (100% expansion) to 1.0800 (23.6% retracement)

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

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)

SEP

2016

09/21/2016 18:00 GMT

0.50%

0.50%

+16

+26

September 2016 Federal Open Market Committee (FOMC) Rate Decision

EUR/USD 5-Minute

EUR/USD Chart

Chart - Created Using Trading View

The Federal Open Market Committee (FOMC) voted 7 to 3 in September to retain the current policy, with Cleveland Fed President Loretta Mester and Boston Fed President Eric Rosengren joining Kansas City Fed President Esther George in the push for 25bp rate-hike. Nevertheless, the majority continued to endorse a wait-and-see approach for monetary policy as ‘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,’ with central bank officials lowering the long-run interest rate forecast to 2.9% from 3.0%, and the U.S. dollar stands at risk of facing headwinds over the remainder of the year should the Fed further delay its normalization cycle. The U.S. dollar struggled to hold its ground following the rate-decision, with EUR/USD bouncing back from 1.1134 to end the day at 1.1184.

Get our top trading opportunities of 2016 HERE

Read More:

S&P 500: Election Volatility and Short-term Trading Levels

Forex Technical Focus: AUD/JPY and a Big Confluence

USD/JPY Rally Vulnerable to Wait-and-See BoJ, 7 to 3 FOMC Split

NZD/USD at Risk for Further Losses Heading into U.S. 3Q GDP

--- Written by David Song, Currency Analyst

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

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