EUR/USD Risks Near-Term Pullback on More Detailed FOMC Exit Strategy

- Federal Open Market Committee (FOMC) to Retain Current Policy.

- Fed Fund Futures Continue to Price 70% Probability for June Rate-Hike.

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

The Federal Open Market Committee’s (FOMC) interest rate decision may generate a limited market reaction as the central bank is widely expected to keep the benchmark interest rate on hold in May, but the fresh policy statement may boost the appeal of the greenback should the 2017-voting members reveal a more detailed exit strategy.

Why Is This Event Important:

With Fed Fund Futures still highlighting a 70% probability for a June rate-hike, the FOMC may increase its efforts to prepare U.S. households and businesses for higher borrowing-costs as the central bank appears to be well on its way to fulfil its dual mandate for full-employment & price stability. In turn, talks of an imminent rate-hike accompanied by a wider discussion to unload the balance sheet may generate a bullish reaction in the greenback, but more of the same from Chair Janet Yellen & Co. may dampen the appeal of the U.S. dollar as officials tame market expectations and look to buy more time.

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Impact that the FOMC rate decision has had on EUR/USD during the previous announcement

March 2017 FOMC Interest Rate Decision

EUR/USD 5-Minute

Even though Minneapolis Fed President Neel Kashkari dissented against the majority, the Federal Open Market Committee (FOMC) voted 9 to 1 to raise the benchmark interest rate to a fresh target range of 0.75% to 1.00%, with officials endorsing three to four rate-hikes for 2017. However, the U.S. dollar came under pressure as the fresh projections coming out of the central bank continue to show a terminal fed funds rate close to 3.00%, with EUR/USD snapping back from 1.0616 to end the day at 1.0702.

How To Trade This Event Risk(Video)

Bullish USD Trade: FOMC Fuels Bets For June Rate-Hike & Balance Sheet Adjustment

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

Bearish USD Trade: Chair Yellen and Co. Stick to Current Script

• Need a green, five-minute EUR/USD candle to favor a short dollar position.
• Carry out the same setup as the bullish dollar trade, just in the opposite direction.

Potential Price Targets For The Release

EUR/USD Daily

Chart - Created Using Trading View

• Broader outlook for EUR/USD may become increasingly constructive as the exchange rate continues to trade above the 200-day SMA (1.0838) following breakout, with price & the Relative Strength Index (RSI) both extending the bullish formations carried over from late-2016.
• Nevertheless, euro-dollar stands at risk for a near-term pullback amid the divergence in the momentum indicator; a bearish RSI trigger appears to be taking shape as the oscillator comes off of overbought territory and fails to preserve the upward trend from the previous month, with the first downside hurdle coming in around 1.0780 (100% expansion) to 1.0790 (38.2% expansion), which lines up with former trendline resistance.
• Interim Resistance: 1.1140 (23.6% expansion) to 1.1160 (38.2% expansion)
• Interim Support: 1.0470 (38.2% expansion) to 1.0500 (50% expansion)

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--- Written by David Song, Currency Analyst

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