Markets were generally calm as investors wait for decision from the Bank of Japan and the Federal Reserve today. While the euro continued its sideways trend between 1.12 and 1.1140 Tuesday, the British pound dropped significantly below 1.30 as European Union leaders recalled the consequences of a Brexit, provided that Article 50 will be invoked next year.
While the Bank of Japan decision is expected to spark some volatile moves in the market this morning, the focus will be on the Fed meeting and Janet Yellen‘s press conference. The Fed is widely expected to hold rates steady this month but there are a few banks forecasting that officials will hike rates. The argument in favor of a rate increase in September is that traders have too steeply discounted Fed officials’ intent to hike after the central bank has remained on hold for longer than expected. Hawks out there are wondering that, if the Fed is confident in its outlook to send a hawkish signal of an upcoming rate hike in December, why not hike rates now? Many would argue that the Fed doesn’t want to derail the economy before the presidential election in November but on the other hand, politics has little impact on the rate setting decision.
In a nutshell, the odds are in favor of a rate increase in December as the Fed doesn’t like to surprise the market. Dollar gains could therefore be limited as the market expects rates to remain on hold. The central bank will also release fresh “dot plot” projections, probably signaling one quarter-point rate hike by the end of the year.
Whatever the case, we will be prepared for surprises as well as breakouts in both directions.
The Fed is due to unveil its rate decision at 18:00 UTC, followed by the FOMC press conference 30 minutes later.
The euro formatted a slight downtrend channel and it will now need to break below the current support level around 1.1130 in order to revive fresh bearish momentum towards the lower bound at 1.1090. In the unlikely event of a Fed rate hike, the dollar will soar, sending the euro below 1.1050. However, above 1.1220 gains could be limited until 1.1290.
The pound fell to a one-month low against the greenback. We now see a next lower target at around 1.29 from where potential pullbacks may occur. Based on the current downward channel we see a resistance at 1.3125. The price action will be however dominated by the appetite for dollars. Below 1.2850 the pound could head for a renewed test of its record-low at 1.2797.
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