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Federal Reserve Interest Rate Forecast to Sway EUR/USD Outlook

Federal Reserve Interest Rate Forecast to Sway EUR/USD Outlook

2017-09-20 14:30:00
David Song, Strategist
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- Federal Open Market Committee (FOMC) to Keep Interest Rate on Hold.

- Will Chair Yellen & Co. Start to Unload the Balance Sheet?

- Sign Up and Join DailyFX Chief Strategist John Kicklighter LIVE to Cover the FOMC Rate Decision.

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

FOMC Interest Rate Decision

The Federal Open Market Committee (FOMC) is widely anticipated to keep the benchmark interest rate on hold in September, but the fresh forecasts from Chair Janet Yellen and Co. may heavily influence the near-term outlook for the dollar as market participants gauge the timing of the next rate-hike.

Fed Rate Forecast

Even though Fed Fund Futures highlight a 50/50 chance for a move in December, the FOMC may stay on course to deliver three rate-hikes in 2017 as ‘data received over the intermeeting period reinforced earlier indications that real GDP growth had turned up after having been slow in the first quarter of this year.’ As a result, a hawkish statement may trigger a bullish reaction in the greenback especially as the ‘Committee expects to begin implementing its balance sheet normalization program relatively soon.’

However, the Fed may soften its hawkish tone as many officials ‘saw some likelihood that inflation might remain below 2 percent for longer than they currently expected,’ and the U.S. dollar may face a more bearish fate if Chair Yellen and Co. forecast a more shallow path for the longer-run interest rate.

Impact that 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)

JUL

2017

07/26/2017 18:00:00 GMT

1.00% to 1.25%

1.00% 1.25%

+94

+89

July 2017 Federal Open Market Committee (FOMC) Interest Rate Decision

EUR/USD 10-Minute Chart

EUR/USD Chart

The Federal Open Market Committee (FOMC) voted unanimously to keep the benchmark interest rate at its current range between 1.00% to 1.25%, with the central bank noting ‘on a 12-month basis, overall inflation and the measure excluding food and energy prices have declined and are running below 2 percent.’ Even though the ‘Committee expects to begin implementing its balance sheet normalization program relatively soon,’ it seems as though the Fed is in no rush to implement higher borrowing-costs as ‘market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.’ The greenback lost ground following the cautious remarks, with EUR/USD climbing above the 1.1700 handle to end the day at 1.1734.

How To Trade This Event Risk(Video)

Bullish USD Trade: FOMC Stays on Course to Further Normalize Policy in 2017

  • Need a red, five-minute candle following the rate decision to consider a short EUR/USD trade.
  • If the market reaction favors a bullish dollar position, 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: Fed Attempts to Buy Time, Endorses Wait-and-See Approach

  • Need a green, five-minute EUR/USD candle to consider a short dollar trade.
  • Implement the same approach as the bullish dollar position, just in the opposite direction.

Potential Price Targets For The Release

EUR/USD Daily Chart

EUR/USD Daily Chart

Check out our EUR/USD quarterly projections in our FREE DailyFX Trading Forecasts

  • EUR/USD appears to be on track to extend the advance from earlier this week as it carves a fresh series of higher highs & lows, but the Relative Strength Index (RSI) continue to deviate from price; need to see the momentum indicator clear the bearish formation carried over from August to favor a further advance in the exchange rate.
  • Will retain a constructive outlook for EUR/USD as long as the pair holds above the 1.1770 (100% expansion) zone, with a break of the monthly-high (1.2092) raising the risk for a more meaningful run at the 1.2130 (50% retracement) hurdle, with the next topside target coming in around 1.2230 (50% retracement).
  • However, a near-term correction in EUR/USD may spur a move back towards 1.1670 (50% retracement), which lines up with the August-low (1.1662), with the next downside region of interest coming in around 1.1580 (100% expansion).
  • Interim Resistance: 1.2320 (23.6% retracement) to 1.2370 (61.8% expansion)
  • Interim Support: 1.1390 (61.8% retracement) to 1.1400 (61.8% expansion)

--- 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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