Fed preview: What to expect of EUR/USD?

The US dollar is mostly lower in the currency market ahead of the Federal Reserve decision, trading at weekly lows versus the EUR, JPY, and NZD. Since last Friday, the Greenback weakened after the FBI reopened the investigation into Hillary Clinton’s emails. EUR/USD is trading at 3-week highs above 1.1100, rising for the second day in a row. 

Politics has taken center stage ahead of the presidential election and amid Trump’s improvement in polls. Today’s FOMC meeting is being offset by politics but also because no change is expected from the Federal Reserve. 

The US dollar dropped further today after the ADP employment. The report showed a gain in private payrolls below expectations (147K vs 165K). Still, the labor market remains solid and is the best argument for those FOMC members that want to raise rates. 

According to the CME Group Fed Watch Tool, the odds of a rate hike today are 7.2% and it rises to almost 70% for a December rate hike. Before the December meeting, financial markets will know what happen at the election and also would have more information. Expectations could change dramatically over the next seven days, with Friday’s NFP and Tuesday’s elections. 

“The Fed could show that every meeting is live and that it is both apolitical and data- dependent by hiking today. But it seems very unlikely that it would do so (and less likely still after yesterday’s market wobble)”, said analysts from RBC, that expect no change today and only a “few tweaks” to the statement. 

Strategists at TD Securities expect the FOMC to keep its monetary stance unchanged at today’s meeting, although the statement could reinforce the case for a rate hike in December. 

A rate hike would be a major surprise that could boost the US dollar. If the Fed remains on hold as mostly expected, the tone of the statement could decide the direction of the US dollar. A dovish bias could favor the US dollar, but the statement should give more than signals of a December rate hike, because that appears to be already discounted on the market. A dovish surprise, such as a signals that December is far from being a done deal (or a decline in the numbers of dissenters -3 members asked for a rate hike back in September-), could weaken the US dollar further in the market, favoring the upside in the EUR/USD. Overall, today’s decision, according to most analysts is likely to have a limited impact as traders focus on the December meeting, discounting no major news today. 
 
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EUR/USD levels 

If the Fed’s decision weakens the US dollar enough, to push EUR/USD above 1.1120, the “risk of an upward extension will be more sustainable, although seems hardly the pair will do that much this Wednesday”, said Valeria Bednarik, Chief Analyst at FXStreet. That area, she notes, is a major static resistance and the 61.8% Fibonacci retracement of the latest decline. 

On the downside, immediate support ahead of the decision could be seen at 1.1075 (20-hour moving average), followed by the 1.1000 region and 1.0950. “Below this last, the pair may return to the base of its long-term range around 1.0850” mentioned Bednarik.