FOMC Meeting in Focus: Risks of EUR/USD Breakout With King Dollar Dethroned

EURUSD, US Dollar, Federal Reserve Analysis and Talking Points

• Fed SEPs Return, No Major Policy Changes for Now
• Fed Looking to Maintain Positive Mood Music
• Option Market Signals: Topside Risk for EUR/USD

Fed SEPs Return, No Major Policy Changes for Now

The main event of the session will be the Federal Reserve monetary policy decision due at 1900BST. In light of the recent rhetoric from Fed officials, the central bank is not expected to announce any major policy changes. However, this meeting will see the returns of the SEPs (Staff Economic Projections) with particular focus likely on the rate outlook to guide future monetary policy.

Fed Looking to Maintain Positive Mood Music

Since the prior Fed monetary policy meeting, the US has embarked on the journey of slowly reopening the economy, which has seemingly run rather smoothly. Alongside this, data has also picked up from the very weak levels, most notably the US jobs report, which showed a 2.5mln gain in May following a 20.5mln loss in the prior month. However, the Fed is likely to highlight that now is not the time to take the foot off the gas and thus maintain an easing bias on the basis that the outlook remains uncertain and that economic growth is still very weak.

Option Market Signals: Topside Risk for EUR/USD

Ahead of the FOMC meeting, option-implied vols have picked up capturing the risk event. EUR/USD ATM overnight vols have gained 5.33 to 14.35, which in turn signals a 68pip break-even (meaning that ATM option straddles will profit on a move over 68pips). Alongside this, option traders have also demanded greater protection for Euro calls, suggesting potential topside risk for the EUR/USD. Before the meeting, Euro spot price may be somewhat contained between 1.13 and 1.14, given sizeable option expiries rolling off at the 10 AM NY cut. That said, with a Fed who is looking to keep volatility at bay, the US Dollar may continue to downtrend, helping lift EUR/USD back to 1.14.

Option Implied Volatility and Risk Reversals

Source: Refinitiv, DailyFX

Option Implied Move

Source: Refinitiv, DailyFX

EUR/USD Price Chart: Daily Time Frame

Source: IG Charts

--- Written by Justin McQueen, Market Analyst

Follow Justin on Twitter @JMcQueenFX