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Flattening Fed Interest Rate Dot-Plot to Fuel EUR/USD Resilience

Flattening Fed Interest Rate Dot-Plot to Fuel EUR/USD Resilience

2017-06-14 15:30:00
David Song, Currency Strategist
Share:

- FOMC to Raise Benchmark Interest Rate by 25bp to Fresh Range of 1.00%-1.25%.

- Will Fed Officials Continue to Forecast a Longer-Run Rate Close to 3.00%?

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

FOMC Interest Rate Decision

With the Federal Open Market Committee (FOMC) widely expected to deliver a 25bp rate-hike in June, the fresh projections coming out of the central bank may play a greater role in shaping the near-term outlook for the U.S. dollar as market participants gauge the pace of the normalization cycle.

Why Is This Event Important:

The FOMC may sound more hawkish this time around amid the growing discussion to unload the balance sheet, and the fresh batch of Fed rhetoric may heighten the appeal of the greenback especially if the central bank unveils a more detailed exit strategy. However, with officials still projecting a terminal fed funds rate close to 3.00%, central bank doves may draft a more shallow path for the benchmark interest rate as ‘market-based measures of inflation compensation remained low; survey-based measures of longer-term inflation expectations were little changed on balance.’ In turn, a downward revision in the Fed projections are likely to produce headwinds for the greenback as it drags on interest-rate expectations.

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Impact that the FOMC 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)

MAY

2017

05/03/2017 18:00:00 GMT

0.75%-1.00%

0.75%-1.00%

-8

-28

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

EUR/USD 10-Minute

EUR/USD Chart

As expected, the Federal Open Market Committee (FOMC) kept the benchmark interest rate in its current range of 0.75% to 1.00%, with the central bank largely endorsing an upbeat outlook for the region as ‘the Committee views the slowing in growth during the first quarter as likely to be transitory.’ With that said, it seems as though the FOMC is on course to further normalize monetary policy over the coming months, and the central bank may lay out a more detailed exit strategy amid the growing discussion to unload the balance sheet. The greenback gained ground as the FOMC remains on course to deliver additional rate-hikes in 2017, with EUR/USDD slipping below the 1.0900 handle to end the day at 1.0883.

How To Trade This Event Risk(Video)

Bullish USD Trade: FOMC Endorses Three Hikes for 2017, Shows Greater Willingness to Unload Balance Sheet

  • Need a red, five-minute candle following the rate decision & press conference to consider a short EUR/USD trade.
  • If 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 Officials Forecast More Shallow Path for Benchmark Interest Rate

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

Potential Price Targets For The Release

EUR/USD Daily

EUR/USD Daily Chart

Chart - Created Using Trading View

  • Near-term outlook for EUR/USD remains tilted to the downside following the failed attempt to test the November-high (1.1299), with the pair at risk for a larger pullback as the Relative Strength Index (RSI) continues to come off of overbought territory.
  • Keep in mind the broader outlook for EUR/USD as it breaks out of the bearish trend carried over from the previous year, with the first downside hurdle coming in around 1.1140 (23.6% expansion) to 1.1160 (38.2% expansion) followed by the Fibonacci overlap around 1.0980 (50% retracement) to 1.1020 (50% expansion)
  • Interim Resistance: 1.1330 (23.6% expansion) to 1.1340 (78.6% retracement)
  • Interim Support: 1.0780 (100% expansion) to 1.0830 (38.2% retracement)

Make Sure to Check Out the DailyFX Guides for Additional Trading Ideas!

IG Sentiment

Retail trader data shows 29.6% of traders are net-long EUR/USD with the ratio of traders short to long at 2.37 to 1. In fact, traders have remained net-short since April 18 when EUR/USD traded near 1.06045; price has moved 6.2% higher since then. The number of traders net-long is 5.8% higher than yesterday and 4.9% higher from last week, while the number of traders net-short is 0.5% higher than yesterday and 2.7% lower from last week. more information on retail sentiment, check out the new gauge developed by DailyFX based on trader positioning.

--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

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