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FOMC Preview: Hawkish Yellen & Co. to Fuel EUR/USD Correction

FOMC Preview: Hawkish Yellen & Co. to Fuel EUR/USD Correction

2017-11-01 14:30:00
David Song, Strategist
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- Federal Open Market Committee (FOMC) to Preserve Current Policy.

- Will Chair Janet Yellen and Co. Endorse a December Rate-Hike?

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

FOMC Rate Decision

The Federal Open Market Committee (FOMC) interest rate decision may generate a limited reaction as the central bank sticks to the sidelines, but the accompanying policy statement may boost the appeal of the U.S. dollar should Chair Janet Yellen and Co. prepare U.S. households and businesses for higher borrowing-costs.

With Fed Fund Futures highlighting a greater than 90% probability for a December rate-hike, a batch of hawkish rhetoric may fuel the near-term decline in EUR/USD as market participants hunt for clues on how the benchmark interest rate will evolve in 2018.

However, more of the same from the FOMC may ultimately spark a bearish reaction in the greenback as officials note that ‘the persistence of low inflation might result in the federal funds rate staying uncomfortably close to its effective lower bound,’ and the committee may endorse a more shallow path for the benchmark interest rate as they struggle to achieve the 2% target for price growth.

Keep in mind, the upcoming rotation within the FOMC is likely to cloud the monetary policy outlook especially as Chair Yellen’s term is set to expire in February, and a fresh appointment by President Donald Trump may keep the central bank on hold throughout the first-half of 2018 amid the mixed signals coming out of the real economy.

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

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

SEP

2017

09/20/2017 18:00:00 GMT

1.00% to 1.25%

1.00% to 1.25%

-136

-123

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

EUR/USD 5-Minute Chart

EUR/USD Chart

The Federal Open Market Committee (FOMC) kept the target range for the benchmark interest rate at 1.00% to 1.25%, but went onto say that ‘in October, the Committee will initiate the balance sheet normalization program described in the June 2017 Addendum to the Committee's Policy Normalization Principles and Plans’ as the U.S. economy approaches full-employment. The fresh projections coming out of the central bank showed minor changes to the growth and inflation forecasts, while a growing number of Fed officials now forecast a more shallow path for the benchmark interest rate as the committee struggles to achieve the 2% target for price growth. Nevertheless, the U.S. dollar gained ground as the Fed plans to wind down its balance sheet, with EUR/USD slipping below the 1.1900 handle to end the day at 1.1890.

Interested in Trading the News? Download the FREE DailyFX Advanced Guide for Building a Basic Strategy

EUR/USD Daily Chart

EUR/USD Daily Chart
  • EUR/USD may continue to give back the advance from the summer months as a head-and-shoulders formation unfolds, with both price and the Relative Strength Index (RSI) still tracking the bearish formations carried over from August.
  • Downside targets remain on the radar as EUR/USD struggles to climb back above the former-support zone around 1.1670 (50% retracement), with a break/close below 1.1580 (100% expansion) raising the risk for a move back towards the Fibonacci overlap around 1.1480 (78.6% expansion) to 1.1500 (78.6% expansion).

Want More Insight? Join DailyFX Currency Analyst David Song LIVE for a preview of the FOMC as well as BoE Interest Rate Decisions!

--- 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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