Fed decision preview: What to expect of EUR/USD?

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Mar 16, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    Today at 18:00 GMT the Federal Reserve will announce its decision on monetary policy and new FOMC projections will be published. Later, at 18:30 GMT, Janet Yellen will hold a press conference. Back in December 2015, when the FED rose rates for the first time in almost a decade, markets consensus pointed that at the March meeting it would raise rates again, for the second time, after taking a pause in January. But much has changed since December, with turmoil across financial markets, particularly among emerging economies, several central banks lowered interest rates and the perspectives of global and US growth were lowered.

    At the January meeting, the Fed did not say much, but make it clear that a decision about March was not taken and that monetary policy continues to be on a path that is “data depended”. While the labor market supports more rate hikes, inflation and the economy overall show some weakness.

    Consensus points that the central bank will keep rates unchanged. Traders will also pay attention to the FOMC projections. The expectation is that now, the staff will expect an even more gradual normalization. USD is likely to move sharply, even if the FED stays on hold; the words of the statement and the projections by itself have the potential to impact on the market.

    The tone of the FED

    The words of the statement and of Yellen will be analyzed; but considering recent history, they could repeat the message and Yellen could use the same tone it used at Congress.

    “The overall tone of the March FOMC meeting should be mixed, reflecting a Fed that is comfortable enough with the recent easing in financial conditions to reassert its tightening bias. Nevertheless, with global growth uncertainties continuing to linger, the tone is likely to remain cautious”, said analyst from TD Securities.

    What to expect in EUR/USD?

    According to Brown Brothers Harriman, if the FED stays on hold as expected, revisions to the "dot plot" (FOMC projections) and Yellen’s press conference are likely to drive currency price action.

    If the Fed keeps rates unchanged, the US dollar could suffer immediately after the announcement if the statement is seen as “dovish”. Afterwards, it could extend the decline if FOMC projection and Yellen signal that a lot of improvement in global financial markets and in the US is needed to restart the tightening cycle. But if she signals that at the next meeting anything is possible, the US dollar could recover some ground and even turned to the upside if there were dissenters asking for a rate hike.

    “Should the FED disappoint, the pair can return to last week highs above 1.1200, and beyond, towards the 1.1240/50 region, a strong static resistance level. Gains beyond this last are unlikely for this Wednesday, but some follow through beyond it could signal a steady advance during the forthcoming sessions towards the 1.1460 region”, said Valeria Bednarik, Chief Analyst at FXstreet.

    EUR/USD and a hawkish surprise

    A rate hike would send the US dollar sharply higher in the market, increasing monetary policy divergences with the European Central Bank. EUR/USD could easily drop to test 1.0800 and a break lower seems possible. Yellen at the press conference could remove momentum to the US dollar if she signals that after the hike a major pause in the normalization process is likely.

    A hawkish message from the FOMC and/or Yellen could also support the US dollar in the market, pushing EUR/USD to the downside. The areas around 1.0970 and 1.0800 are seen as relevant supports. Also a close significantly below 1.1020, where the 20-day moving average currently stands, could signal a bearish continuation; while holding above, the tone could continue to favor the euro.

    It's all about expectations

    EUR/USD volatility is likely to increase with the FED; after the immediate reaction, the main candidate to drive action are “expectations”: a few minutes after the FED explains what it has decided, the relevant factor will be “what it could do next”. Remember the recent ECB meeting, when the central bank lowered interest rates: initially EUR/USD dropped sharply but then rebounded, supported by future expectations.

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