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EUR/USD Bulls Vulnerable on Bets for 2015 Fed Rate Hike

David SongShuyang Ren

DailyFX.com -

- Seeing Wide Range of Expectations for Federal Open Market Committee (FOMC) Rate Decision.

- If the Fed Retains Current Policy, Will the Statement Reflect a Greater Dissent?


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

According to a Bloomberg News survey, 59 of the 113 economists polled see the Federal Open Market Committee (FOMC) retaining its current policy in September, but the fresh updates coming out of the central bank may boost the appeal of the greenback and spur a near-term decline in EUR/USD should Chair Janet Yellen keep a 2015 rate hike on the table.


What’s Expected:

EUR/USD FOMC

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Why Is This Event Important:Another unanimous vote to remain on hold may erode the bullish sentiment surrounding the greenback as it drags on rate expectations, but signs of a greater dissent may keep the committee on course to remove the zero-interest rate policy (ZIRP) later this year as central bank officials anticipate a stronger recovery to emerge going forward.


Expectations: Bullish Argument/Scenario

Release

Expected

Actual

Real Average Weekly Earnings (YoY) (AUG)

--

2.3%

Unemployment Rate (AUG)

5.2%

5.1%

Gross Domestic Product (Annualized) (QoQ) (2Q P)

3.2%

3.7%

The Fed may keep the door open to raise the benchmark interest rate later this year as the economy approaches full-employment, and a surprise rate-hike or hints of a December liftoff may generate a near-term rally in the dollar as market participants price higher borrowing-costs for the U.S.


Risk: Bearish Argument/Scenario

Release

Expected

Actual

Consumer Price Index ex Food and Energy (YoY) (AUG)

1.9%

1.8%

Advance Retail Sales (MoM) (AUG)

0.3%

0.2%

U. of Michigan Confidence (SEP P)

91.1

85.7

However, subdued inflation paired with the ongoing weakness in personal consumption may encourage the Fed to further support the real economy, and a dovish policy statement accompanied by a marked downward revision in the interest rate forecast may spur a sell-off in the greenback as market participants scale back bets for a rate hike in 2015.


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How To Trade This Event Risk(Video)

Bullish USD Trade: Fed Delivers Rate Hike or Hawkish Forward-Guidance

  • Need red, five-minute candle following the rate decision to consider a short EUR/USD position.
  • If market reaction favors a bullish dollar trade, sell EUR/USD with two separate position.
  • Set stop at the near-by swing low/reasonable distance from cost; at least 1:1 risk-to-reward.
  • Move stop to entry on remaining position once initial target is met, set reasonable limit.


Bearish USD Trade: Committee Continues to Endorse Wait-and-See Approach

  • Need green, five-minute candle to favor a long EUR/USD trade.
  • Implement same strategy as the bullish dollar trade, just in the opposite direction.


Potential Price Targets For The Release


EURUSD Daily

EUR/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • Will keep a close eye on the monthly range as EUR/USD fails to retain the recent series of lower highs & lows; still waiting for a break of the bullish RSI momentum carried over from March to favor a resumption of the long-term downward trend.
  • DailyFX Speculative Sentiment Index (SSI) shows the retail crowd remains net-short EUR/USD since March 9, but the ratio remains off of recent extremes as it sits at -1.66, with 38% of traders long.
  • Interim Resistance: 1.1760 (61.8% retracement) to 1.1810 (38.2% retracement)
  • Interim Support: Interim Support: 1.0790 (50% expansion) to 1.0800 (23.6% expansion)


Read More:

AUDJPY Approaching Monthly Open- Range Break to Determine Scalp Bias

USDOLLAR Weighed by Soft Core CPI- Support at Risk on Dovish Fed


Impact that the FOMC rate decision has had on EUR/USD during the last meeting

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

JUL

2015

07/29/2015 18:00 GMT

0.25%

0.25%

-36

-65

July 2015 Federal Open Market Committee (FOMC) Interest Rate Decision

EUR/USD Chart

The Federal Open Market Committee (FOMC) stuck to the sidelines in July and continued to endorse a wait-and-see approach as the central bank looks for afurther improvement in labor market. As the Fed remains ‘data dependent,’ signs of a stronger recovery may keep the central bank on track to raise the benchmark interest rate in 2015, and we may see a growing number of Fed officials adopt a more hawkish tone over the coming months as Chair Janet Yellen anticipates a stronger recovery to materialize over the remainder of the year. The dollar strengthened as the Fed remains upbeat on the economy, with EUR/USD quickly slipping back below the 1.1050 region to end the day at 1.0979.


--- Written by David Song, Currency Analyst and Shuyang Ren


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


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