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EUR/USD Weakness Persists- Bearish Series Takes Shape Ahead of FOMC

EUR/USD Weakness Persists- Bearish Series Takes Shape Ahead of FOMC

David Song, Strategist

- Federal Open Market Committee (FOMC) to Raise Benchmark Interest Rate by 25bp in March.

- Will Majority of Fed Officials Highlight a Shallow Path for Fed Funds?

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) meeting may heighten the appeal of the greenback as the central bank is widely expected to deliver a 25bp rate-hike in March, but the updated projections may generate a knee-jerk reaction should Chair Janet Yellen and Co. increased their efforts to tame interest-rate expectations.

What’s Expected:

DailyFX Calendar

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Why Is This Event Important:

Fed Dot-Plot

Source:FRB

Comments endorsing a June rate-hike should generate a bullish reaction in the U.S. dollar as some Fed officials see scope for three or four rate-hikes in 2017. However, the majority may continue to highlight a shallow path for the fed funds rate as Chair Yellen argues ‘inflation moved up over the past year, mainly because of the diminishing effects of the earlier declines in energy prices and import prices.’ In turn, the FOMC may continue to warn ‘market-based measures of inflation compensation remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance,’ and the dollar may struggle to hold its ground should the committee adopt a more neutral tone and attempt to buy time.

Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Average Hourly Earnings (YoY) (DEC)

2.8%

2.8%

Personal Income (JAN)

0.3%

0.4%

Advance Retail Sales ex Auto & Gas (JAN)

0.3%

0.7%

Signs of stronger wage growth accompanied by the pickup in household spending may keep the FOMC on course to further normalize monetary policy over the coming months, and the dollar may stage a near-term rally should the fresh batch of central bank forecasts boost interest-rate expectations.

Risk: Bearish Argument/Scenario

Release

Expected

Actual

Consumer Credit (JAN)

$17.250B

$8.794B

Core Personal Consumption Expenditure (QoQ) (4Q P)

1.3%

1.2%

U. of Michigan Confidence (FEB P)

98.0

95.7

However, the recent decline in household sentiment paired with the ongoing weakness in core price growth may push central bank officials to adopt a cautious outlook for the U.S. economy, and the greenback may struggle to hold its ground should the central bank largely endorse a wait-and-see approach for monetary policy.

For More Updates, Join DailyFX Currency Analyst David Song for a Preview on the FOMC Meeting!

How To Trade This Event Risk(Video)

Bullish USD Trade: FOMC Raises Benchmark Interest Rate & Endorses June Rate-Hike

  • 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 Endorse Wait-and-See Approach

  • 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

  • EUR/USD may continue to give back the advance from earlier this month following the series of failed attempt to close above the Fibonacci overlap around 1.0660 (50% expansion) to 1.0680 (78.6% expansion), with the broader outlook still tilted to the downside amid the deviating paths for monetary policy; will keep a close eye on the downside targets especially as the euro-dollar exchange rate starts to carve a series of lower highs, with a break/close below 1.0500 (23.6% expansion) opening up the next region of interest around 1.0470 (38.2% expansion) to 1.0500 (50% expansion).
  • 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)

FEB

2017

02/01/2017 19:00 GMT

0.75%

0.75%

+40

+33

February 2017 FOMC Interest Rate Decision

EUR/USD 5-Minute

EUR/USD Chart

Chart - Created Using Trading View

The Federal Open Market Committee (FOMC) kept the benchmark interest rate with the current target range of 0.50% to 0.75%, with the central bank striking a rather balanced tone as officials note the ‘near-term risks to the economic outlook appear roughly balanced.’ Even though Chair Yellen and Co. appear to be on course to further normalize monetary policy in 2017, the central bank appears to be in no rush to remove the highly accommodative policy stance as ‘market-based measures of inflation compensation remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance.’ The U.S. dollar struggled to hold its ground as the FOMC reverted back to its wait-and-see approach, with EUR/USD snapping back from 1.0729 to end the day at 1.0768.

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

Read More:

Technical Weekly: USD/JPY 115.50-116.00 is a Clear Trading Barrier

S&P 500 Pulls Back to Support and Holds; Rip to New Highs or Consolidation Next?

What To Watch On The Breakdown In Oil & Gold As DXY Accelerates

PBOC, Fed Remain Key Drivers to Yuan

--- 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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