FOMC preview: What to expect from EUR/USD?

EUR/USD awaits the FOMC announcement trading in a modest range between 1.0600 and 1.0670. The pair remains with a modest bullish tone but the next price moves are likely to be determined by how the FOMC and Yellen sound, regarding the future of the monetary policy, if the Federal Reserve moves as expected. 

Fed likely to raise rates 

According to the CME Group FedWatch Tool, markets have priced in a probability of a 95% rate hike today. So, if correct, the US central bank will raise rates by 25bp from the target range of 0.25% - 0.50% to 0.50% - 0.75%. It would be the first hike in a year.

What to look for if the Fed hikes as expected? If the Fed acts as expected attention would turn to the words used in the statement, to FOMC staff projections and to Janet Yellen, that will hold a press conference following the decision.

“The day’s highlight will be the FOMC meeting, where a Fed funds rate hike to a 0.50%-0.75% range is widely expected (and priced in by markets). Thus, any surprises will come from the tone of the statement and Yellen’s press conference. Also of interest will be the updated economic forecasts and Fed funds rate projection, with markets currently fully agreeing with the two hikes projected in 2017,” said analysts from Westpac. 

Economists from Nomura also expect a rate hike, taking into account that the incoming data since the last meeting has been sufficiently positive for the FOMC to conclude that the case for rate hike has been finally met. “Our base scenario is that FOMC participants will not change their outlook for 2017 and beyond as we do not think the Committee will incorporate the possibility of fiscal expansion. It's unclear when and how FOMC participants will take into account potential changes in fiscal policy”. 

The victory of Donald Trump added the discussion about fiscal policy. It would be the first meeting since the elections. It is not clear if the FOMC will say something about the outlook of fiscal policy. But any case, if they move rates, the statement would have to add new words. Investors will look deeply, into those new words, in order to get clues about the future path of monetary policy. 

FOMC Preview: Fed set to hike, focus on outlook for 2017 – Danske Bank

If the Fed remains on hold, it would be a huge surprise that could trigger a sharp decline of the US dollar, sending the EUR/USD to the upside and probably boosting equity prices, at least for some hours.  

Will it be different? 

When something extremely expected happens, markets could move under a “buy the rumor, sell the fact” scenario. 

The last time the Fed rose rates was a year ago. It triggered a risk aversion environment that lead to a decline of Wall Street indexes of more than 10% during the next months, gold soared from $1150 to $1360 (July). The bond market also did interesting moves. Initially, US bond yields rose modestly the week after the Fed decision, but then, risk aversion boosted the demand for Treasuries pushing bonds yields sharply to the downside. EUR/USD, a year ago, before the Fed rate hike was trading around 1.09, it moved modestly to the downside, bottomed in January at 1.07 and then moved with a bullish bias until early May. This time, will it be different? 

EUR/USD key levels 

From the current level, the immediate short-term relevant support could be seen around 1.0590-1.0600 (Dec 13 & 14 low). Below here, the next key level to watch is the 1.0500 region, that could be exposed if Yellen is interpreted as hawkish. A break below would put the euro at fresh 2016 lows and on it way toward the next probable target at 1.0460 (2015 low). A consolidation below, would add more bearish pressure to the pair, opening the doors for a potential decline toward 1.0300. 

On the upside, a dovish Fed, could push the EUR/USD pair to the upside. The immediate resistance is seen at 1.0670. Above here, the next key level could be 1.0700. According to Valeria Bednarik, Chief Analyst at FXStreet, a break above would see little in the way toward 1.0800. “Steady gains beyond 1.0850 are required to deny the bearish case for the pair, and see a recovery towards the 1.1000 region during the rest of the month.”

FOMC meeting: looking beyond a rate hike