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Hawkish Fed Rhetoric to Keep EUR/USD Capped by December High

Hawkish Fed Rhetoric to Keep EUR/USD Capped by December High

2017-02-01 16:00:00
David Song, Strategist
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- Federal Open Market Committee (FOMC) to Keep Rates at 0.50% to 0.75%.

- Fed Fund Futures Projects 70% Probability for June Rate-Hike.

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

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

The Federal Open Market Committee (FOMC) is expected to retain the current policy after delivering a 25bp rate-hike at the last interest rate decision for 2016, but fresh batch of comments from Chair Janet Yellen and Co. may heighten the appeal of the U.S. dollar as the central bank appears to be on course to further normalize monetary policy over the coming months.

What’s Expected:

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Why Is This Event Important:It seems as though the FOMC will sit sidelines during the first-half of 2017 as officials wait for further details on the Trump administration’s economic agenda, but the majority may continue to endorse two to three rate-hikes for 2017 as most members ‘anticipate that inflation would rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipated and the labor market strengthened further.’ In turn, Fed Fund Futures may continue reflect market expectations for a June rate-hike, and the committee may reiterategradual adjustments in the stance of monetary policy would be appropriate’ as Chair Yellen sees the central bank ‘closing in’ on its dual mandate.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Core Personal Consumption Expenditure (YoY) (DEC)

1.7%

1.7%

Consumer Price Index ex. Food and Energy (YoY) (DEC)

2.2%

2.2%

Average Hourly Earnings (YoY) (DEC)

2.8%

2.9%

Sticky price growth accompanied by signs of stronger household earnings may encourage the FOMC to adopt a more hawkish outlook for monetary policy, and the fresh comments may heighten the appeal of the greenback should Fed officials adopt an improved outlook for the U.S. economy.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Durable Goods Orders (DEC P)

2.5%

-0.4%

Advance Retail Sales ex. Auto (MoM) (DEC)

0.5%

0.2%

Non-Farm Payrolls (DEC)

175K

156K

Nevertheless, easing job growth along with the slowdown in private-sector consumption may push Fed officials to endorse a more dovish tone this time around, and the dollar may struggle to hold its ground should the policy statement talk down bets for a June rate-hike.

For a Fed Preview, Join DailyFX Currency Analyst David Song for LIVE Analysis!

How To Trade This Event Risk(Video)

Bullish USD Trade: FOMC Stays on Course to Implement Higher Borrowing-Costs

  • Need red, five-minute candle following the rate decision to consider a short EUR/USD trade.
  • 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 Adopt Cautious Outlook

  • Need green, five-minute candle to favor a long EUR/USD position.
  • 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 Trading View

  • After finally closing above the Fibonacci overlap around 1.0780 (100% expansion) to 1.0800 (23.6% retracement), EUR/USD stands at risk of making a more meaningful run at the December high (1.0873), but the broader outlook remains confined by the downward trend carried over from the previous year; the Relative Strength Index (RSI) highlights a similar dynamic as it preserves the bearish formation from 2015, with the oscillator showing signs of exhaustion as appears to be turning around ahead of overbought territory.
  • Interim Resistance: 1.0880 (61.8% expansion) to 1.0910 (38.2% expansion)
  • Interim Support: 1.0340 (2017-low) and 1.0370 (38.2% expansion)

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)

DEC

2016

12/14/2016 19:00 GMT

0.75%

0.75%

-96

-113

December 2016 FOMC Interest Rate Decision

EUR/USD 5-Minute

EUR/USD Chart

Chart - Created Using Trading View

The Federal Open Market Committee (FOMC) raised the benchmark interest rate by 25bp to a fresh target range of 0.50% to 0.75%, with the majority of central bank officials projecting two to three rate-hikes for 2017. As the central bank reiterates ‘inflation is expected to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further,’ it seems as though Chair Janet Yellen and Co. will stay on course to implement higher borrowing-costs over the coming months, but the central bank looks poised to reestablish its wait-and-see approach at the start of 2017 amid the uncertainty surrounding the fiscal outlook. The U.S. dollar rallied against its major counterparts following the Fed rate-hike, with EUR/USD pushing below the 1.0600 handle to end the day at 1.0533.

If you’re looking for trading ideas, check out our Trading Guides

Read More:

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DailyFX Roundtable: BoJ, Fed and BoE Preview

GBP/USD to Take Cues From FOMC/BoE Interest Rate Outlook

Technical Weekly: Is USD/CHF the Tell?

--- 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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