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FOMC Preview: EUR/USD Risks Larger Rebound on Dovish Fed Rate-Hike

FOMC Preview: EUR/USD Risks Larger Rebound on Dovish Fed Rate-Hike

David Song, Strategist

- Federal Open Market Committee (FOMC) to Raise Benchmark Interest Rate by 25bp to Fresh Threshold of 1.50% to 1.75%. Jerome Powell to Hold First Press Conference as Fed Chairman.

- EUR/USD Rebounds Ahead of FOMC to Preserves Monthly Opening Range. Relative Strength Index (RSI) Continues to Track Bearish Formation.

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

DailyFX Calendar

The Federal Open Market Committee (FOMC) interest rate decision may rattle the recent rebound in EUR/USD as the central bank is widely expected to raise the benchmark interest rate to a fresh threshold of 1.50% to 1.75%, but a dovish rate-hike may produce headwinds for the greenback as it dampens the scope for a more aggressive hiking-cycle.

Fed Fund Forecast

Market participants are likely to pay increased attention to the updated forecast coming out of the FOMC as the committee appears to be on track to further normalize monetary policy over the coming months. Chairman Jerome Powell and Co. may continue to prepare U.S. households and businesses for higher borrowing-costs as ‘a majority of participants noted that a stronger outlook for economic growth raised the likelihood that further gradual policy firming would be appropriate,’ and a fresh batch of hawkish rhetoric may generate a bullish reaction in the U.S. dollar as it boosts bets for another rate-hike at the next quarterly meeting in June.

However, more of the same from the FOMC may drag greenback as it curbs speculation for four rate-hikes in 2018, and ongoing projections for a longer-run Fed Funds rate of 2.75% to 3.00 may ultimately fuel the near-term rebound in EUR/USD as Chairman Powell and Co. appear to be on a preset course.

Impact that the FOMC interest rate decision 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)

JAN

2018

01/31/2018 19:00:00 GMT

1.25% to 1.50%

1.25% to 1.50%

-2

-6

January 2018 Federal Open Market Committee (FOMC) Interest Rate Decision

EUR/USD 10-Minute Chart

EUR/USD 10-Minute Chart

The Federal Open Market Committee (FOMC) stuck to the same script at Chair Janet Yellen’s last meeting, with the central bank reiterating that ‘economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate’ even as the committee voted unanimously to keep the benchmark interest rate at 1.25% to 1.50%. The comments suggest the FOMC will follow a similar path to 2017 as ‘inflation on a 12‑month basis is expected to move up this year and to stabilize around the Committee's 2 percent objective over the medium term,’ but a growing number of central bank officials may start to project a more shallow path for the benchmark interest rate as price growth continues to run below target.

Despite the initial spike in market volatility, the reaction was short-lived, with EUR/USD largely consolidating throughout the remainder of the day to close at 1.2413. Want more insight? Join DailyFX Chief Currency Strategist John Kicklighter LIVEto cover the FOMC interest rate decision.

EUR/USD Daily Chart

EUR/USD Daily Chart
  • Near-term outlook for EUR/USD remains mired by the failed attempt to test the March-high (1.2446), with the pair still at risk of making a run at the monthly-low (1.2155) as the Relative Strength Index (RSI) continues to track the bearish formation carried over from the previous month.
  • Need a break/close below 1.2230 (50% retracement) to open up the 1.2130 (50% retracement) hurdle, with the next downside region of interest coming in around 1.1960 (38.2% retracement) to 1.1970 (23.6% expansion).
  • Keep in mind, need a move back above the 1.2430 (50% expansion) region to bring the topside targets back on the radar, with the first area of interest coming in around 1.2640 (61.8% expansion) to 1.2650 (38.2% retracement).

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--- 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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