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Loss of Fed’s Credibility to Hurt The U.S. Dollar?

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A new trading week kicks off and top event risk will be the FOMC rate decision on Wednesday.

The Federal Reserve’s abrupt departure from being patient on inflation which was still considered ‘transitory’ just a few months ago to panicking on inflation with a current probability of four rate hikes in 2022 results in a loss of credibility. While a March rate hike is almost a done deal to control the ‘previous transitory’ price pressures, a majority of economists predicted the central bank will use its January meeting to deliver a 25 bp or even a surprise 50 bp rate hike which would be the largest since 2000. Speculation about five rate increases this year is also on the table.

What will the Fed’s rapid shift mean for the U.S. dollar?

As we could see, U.S. dollar bulls seemed to be largely unimpressed by the Fed’s hawkish turn with the greenback experiencing even a drop against other counterparts. In the face of the central bank’s losing credibility, we could imagine that the U.S. dollar is at risk of dropping despite the Fed’s accelerated rate hike path.

Technically, both EUR/USD and GBP/USD look oversold in daily time frames which could lead to short-term upward movements. However, bulls should take a cautious approach as risk trends can slip. Current resistances are seen at around 1.37 in the GBP/USD and at 1.1430 in the EUR/USD. Bear in mind that dollar bulls could pile in ahead of the FOMC announcement but might take any potential profits quickly.

Apart of Wednesday’s FOMC decision we will have the 4Q U.S. GDP Thursday and the PCE deflator (the Fed’s favorite inflation indicator) Friday.

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Can Powell Meet The Market’s Hawkish Expectations?

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Today is the Federal Reserve’s rate decision day and market participants expect the Fed to unveil a quicker tapering of bond purchases that paves the way for interest rate hikes next year. We will remain cautious going into the FOMC announcement at 19:00 UTC tonight.

Expectations are very high and so is the risk for disappointment. The market currently expects the Fed to raise rates next year three times with a 61.5 percent probability of at least three hikes. There is even a 31.8 percent probability of four rate hikes in 2022.

The broad-based U.S. dollar strength remained in-play until today as the market discounted the Fed’s hawkish approach but can the Fed live up to the market’s high expectations? Maybe not as the omicron variant created a bit of concern for economic trends and should the Fed share this concern at today’s press conference, investors could give up on dollar long positions. In terms of rate hike expectations, traders will want to see at least two rate hikes next year via the dot plot matrix to remain dollar bullish.

Anything is possible today and traders are well advised to maintain a cautious approach going into today’s policy decision.

Breakout-Mode

EUR/USD: Below 1.1220, euro-bears could send the pair for another test of 1.12/1.1185. If 1.1180 breaks, bearish momentum could accelerate toward 1.11 and maybe even 1.10 but for such a strong dollar move we would need a hawkish shift from the Fed. In case of a disappointment, we could see a short-squeeze with a test of the resistance zones at 1.1320-40 and 1.14.

GBP/USD: Holding above 1.3120 and 1.31 could pave the way for a reversal toward 1.35 and maybe even 1.37. The Bank of England is expected to hike next and if the dollar’s strength fades, sterling bulls may take the opportunity to push the cable higher.

 

Disclaimer: All trading ideas and expressions of opinion made in the articles are the personal opinion and assumption of MaiMarFX traders. They are not meant to be a solicitation or recommendation to buy or sell a specific financial instrument.

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Fed Taper a Foregone Conclusion, Focus Instead on Taper Pace

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It’s FOMC decision day and a taper announcement seems a forgone conclusion. The question among investors is rather when the FOMC will complete its asset purchases (speed of tapering) and when they will start to raise interest rates.

Most economists expect the Federal Reserve to reduce bond purchases by $15 billion every month and complete the taper by mid-2022 (eight months).

As Fed policy makers have said that they want to end the taper before moving to possible rate hikes, most attention will be paid to the taper pace. In case of a quicker end to the tapering, the U.S. dollar will rise.

The focus will also be on the Fed’s language regarding inflation. If the committee retains the language that elevated inflation is “largely reflecting transitory factors”, the dollar will weaken. If today’s FOMC statement is however more hawkish, stating that inflation is lasting longer than expected, the dollar will strengthen as the market speculates on earlier rate hikes.

Speaking of rate hikes and even though the market speculates on a faster rate hike path, diverging from the forecast of Fed policy makers, economists expect the Fed to suggest a liftoff when the unemployment rate falls to 4 percent.

Traders prepare for heightened volatility around the time of the FOMC statement today at 18:00 UTC.

EUR/USD technical view: If the euro falls again below 1.1540, chances of a bearish 1.15-breakout increase with lower targets seen at 1.1480 ad 1.1450. On the upside, price breaks above 1.1640 and 1.1670 will spur bullish momentum towards 1.1720.

GBP/USD technical view: Below 1.3580 we will turn our focus to lower targets at 1.3550 and 1.3450. On the upside, the 1.3750-area could serve as a resistance whereas a break above 1.3780 could attract more buyers towards a higher a target at 1.3820. However, larger fluctuations will be expected tomorrow, which is why the cable could be reluctant to big price movements today.

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Pivotal Week

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It will be a big week for traders with crucial central bank meetings in the U.S. and U.K. on tab as well as the U.S. Nonfarm payrolls report at the end of this pivotal week.

The market’s expectations of the FOMC decision on Wednesday are clear. Fed policy makers are expected to decide to scale back their massive bond-purchase program while this expectation is fully priced in into the U.S. dollar’s steadiness. When it comes to interest rate hikes, Fed Chair Jerome Powell told a virtual panel discussion on Oct. 22 that policy makers “can be patient” and “allow the labor market to heal”. Powell expects that jobs growth moves back up closer to the high levels seen last summer.

A first test of Powell’s expectations will come on Friday with the October jobs numbers due for release. Economists forecast that payrolls show a bigger jobs gain than the report in September but numbers are expected to be below the 1.03 million monthly average in June and July.

The crux

It is a very tricky job for monetary policy makers since the labor market has changed following the Covid-19 shock. Many jobs are not going to come back while millions of Americans were prompted to permanently leave the workforce or have retired early because of the crisis. The changes to the jobs market could thus be more lasting than Powell apparently believes, making it difficult to return to pre-pandemic levels without spurring inflation.

The hawkish surprise

Most attention will be paid to the Bank of England interest rate decision on Thursday. The expectation is that the BoE will deliver a 15bps rate rise given the heightened concerns over inflation. If BoE policy makers however choose not to raise rates, the pound will experience its most negative scenario with potential price dips. In the GBP/USD we currently see a potential trading range between 1.40 and 1.3330 and prepare for high volatility in the coming days.

EUR/USD

Last week, the euro was temporally boosted by the ECB’s reluctance to push back against market rate hike bets but the single currency has returned to its support levels and ended last week lower. If the euro falls below 1.1520 and further 1.15, we will shift our focus to a lower target at 1.1450. Falling below 1.14 could spur a bearish follow-through until 1.12. For bullish momentum to accelerate we would need to see a renewed break above 1.16 and 1.1630.

Conclusion

The market is pricing in two Fed rate hike by the end of 2022. Any shift away from these hawkish expectations will hurt the dollar. If Powell acknowledges however upside risks to inflation at the Fed press conference, the dollar could further strengthen.

The BoE will be tightening nonetheless, regardless of whether policy makers decide to raise rates this Thursday or months later. This expectation could buoy the pound in the medium-term.

 

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Will The Fed Meet The Market’s Hawkish Expectations?

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It was a kind of turnaround-Tuesday with the U.S. dollar edging down after its most recent acceleration. However, it seemed that the market was just taking a breather ahead of today’s Federal Reserve decision. The sentiment could remain constrained until the decision at 18:00 UTC.

The Fed is expected to signal a reduction in stimulus later this year. The focus will also be on the dot plot rate hike forecasts. However, the FOMC announcement could be a tricky one as the Fed moves increasingly closer to scaling back asset purchases amid a deteriorating global economic backdrop where slowing GDP growth estimates in the U.S., relatively high inflation and rising Covid cases are posing a threat.

What is expected today?

Market participants expect a hawkish Fed with a strong hint that the taper will begin before the end of the year following a formal announcement in November.

The hawkish scenario: If the Fed thinks it is time to taper and if the dot plot shows a first rate hike in late 2022 the dollar will rise.

The dovish scenario: If the Fed disappoints the market’s expectations, stating that taper conditions haven’t been met and if Fed Chair Jerome Powell downplays the countdown for a rate liftoff, the dollar will sharply fall.

Most interesting for traders will be the dot-plot forecast due for release at 18:00 UTC and Powell’s press conference at 18:30 UTC.

EUR/USD: If the euro climbs above 1.1765, we expect the pair to test the 1.1770-1.18 price area. A current support zone remains intact between 1.17 and 1.1660. For a bullish breakout we would need a rise above 1.1850 which would shift the sentiment in favor of the bulls.

GBP/USD: The pair still remains oversold while hovering around 1.3650. If the cable falls below 1.3630 and further 1.36, we see a next lower target at 1.3550. On the upside we look at a resistance zone between 1.38 and 1.39.

 

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FOMC Event: Price Targets To Watch Out For

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Today will be an important trading day for traders as it may be the last one before the summer doldrums providing bigger market moves.

All eyes will be on the Federal Reserve decision at 18:00 UTC followed by Fed Chair Jerome Powell’s press conference 30 minutes later.

The base case scenario is dovish: While the U.S. employment gains are solid, the Fed has not seen the hoped-for job gain of more than a million, which could have been a condition to begin scaling back monetary support. Instead, labor market reports for the months of April and May have been disappointing relative to previous forecasts, strengthening the Fed’s argument that the job market is still a long way off from the “substantial further progress”.  The Fed could therefore wait for further improvements before starting the taper debate. In this case, the U.S. dollar could fall on the back of disappointment.

The hawkish surprise: In the unlikely case of the begin of the discussion to reduce asset purchases, the greenback will rise against other peers.

The focus will also be on the Fed’s dot-plot forecast. It is expected that the forecast will shift to an earlier rate hike expectation in 2023 from 2024 back in March. This would be dollar-positive.

Let’s take a brief look at the technical picture:

GBP/USD

The pound dipped below 1.4070 but held firmly above 1.40. If the 1.40-support remains unbroken, we anticipate a rebound towards 1.4150. For significant price breakouts, we would need to see either a bullish break above 1.42 or a bearish break below 1.40. Above 1.42 we will shift the focus to a higher target at 1.4290, whereas below 1.40, next targets could be at 1.3920 and 1.38.

EUR/USD: Not much has changed in this pair. As long as the euro trades between 1.2230 and 1.2080 there is nothing new to report. A rise above 1.2250 could open the door to further gains towards 1.2350, whereas on the downside, a fall below 1.2080 could lead to further losses towards 1.20 and probably even 1.1940.

We wish everyone good trades today.

We wish you good trades!

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FOMC To Provide An Excuse For Profit-Taking On Dollar Long Positions?

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Dear Traders,

The U.S. dollar showed no signs of weakness and extended its gains versus other major peers Tuesday. Thus, short traders in the EUR/USD and GBP/USD were once again able to book a good profit.

Having just warned in our analysis from Monday that signs could point to a bearish breakout, that break below crucial key levels in both of our major currency pairs came faster than we had expected. Despite the oversold situation in many major pairs and the need for consolidation, the U.S. dollar continued its bullish bias for the 9th trading day pushing its counterparts even lower. While the greenback’s linear rise is surprising, many traders wonder how long this dollar move will last. However, we continue to warn traders of profit-taking and potential pullbacks.

The market focus will now turn to the Federal Reserve meeting and FOMC rate decision today at 18:00 UTC.  The expectation for any change in monetary policy is very low at this meeting with no updated forecasts and no press conference from Fed Chairman Powell. However, the meeting should be a runway for another rate hike in June and if Fed policy makers don’t commit to rate increase next month the dollar will quickly fall as market participants are positioned for hawkishness from the Fed.

Investors will closely watch for whether the Fed makes more explicit its intention to raise rates three more times this year, for a total of four hikes in 2018.

In a nutshell, while the policy statement is expected to tilt to the hawkish side, there is a risk of disappointment. Dollar bulls may thus take the opportunity to take profit on dollar long positions.

Before coming to the FOMC decision, we will watch the ADP Employment Change at 12:15 UTC.

EUR/USD

The euro fluctuates around the 1.20-level while still being in oversold territory. We now expect the pair to trade between 1.2050 on the upper side and 1.1950 on the lower side.

GBP/USD

Given the strong bear candles in the daily chart we expect the risk to remain tilted to the downside with a lower target being at 1.3530/1.35. However, the cable is deeply oversold, which is why we prepare for pullbacks towards 1.37 and 1.3730.

 

 

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Focus Turns To The Fed: Dot-Plot To Show 4 Rate Hikes This Year?

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Dear Traders,

This trading week has been, so far, not only volatile but also very profitable for traders. Yesterday, we saw the U.S. dollar gaining back ground against the euro and British pound ahead of today’s highly anticipated FOMC decision. Thus, short traders were able to book a good profit.

The pound slipped below 1.40 after U.K. inflation data came in worse-than-expected but losses were limited due to hopes that tomorrow’s Bank of England statement will be hawkish.

The euro sold off after the German and Eurozone ZEW Surveys fell well below expectations.

Today, all eyes will be on the Fed decision due at 18:00 UTC followed by Jerome Powell’s news conference 30 minutes later. Market participants are curious whether the central bank will lift its projections for the pace of policy tightening this year. While a 25-basis-point rate is almost certain the focus will turn to updated economic projections (SEP – Summary of Economic Projections) and the Fed’s dot plot forecast. If the dot plot shows monetary policy makers favoring 4 rate hikes this year, the dollar will rise. Anything else could disappoint the market’s high expectations and could send the dollar tumbling.

While today’s Fed decision will be one of the most important decisions in years, it does not mean that it will be market-moving in terms of profitable trading opportunities. As usual, we will prepare for both bullish and bearish scenarios and will update traders (subscribers) about all current and pending trades on our live signal page.

We wish you profitable trades for today!

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We wish you good trades and many pips!

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Will Yellen’s Final Move Depreciate The USD?

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Dear Traders,

It’s decision day at the Federal Reserve and what makes this final policy decision of the year a significant meeting is not the anticipated rate hike, but the monetary policy outlook for 2018. While the market is certain of a third 2017 hike, the focus will turn to forecasts for the pacing through 2018. We will therefore keep an eye on the dot-plot in order to shape expectations for next year’s rate hike path. If the Summary of Economic Projections (SEP) projects another three or possibly even four rate hikes ahead, the dollar will further rally. However, it is very unlikely that the Fed surprises the market and accelerates its pace. Hence, there is a risk of disappointment today, which could lead to a sell-off in the dollar. We recommend preparing for heightened volatility during the entire North American trading session, while most price action will take place around the FOMC decision and press conference, as well as the CPI reading that will be due before the rate decision.

For Fed Chair Janet Yellen it will be her final quarterly press conference before she steps down in February. It is therefore unlikely that she will signal any new prospects on the Fed’s guidance.

13:30 USD Consumer Price Index (CPI)

19:00 USD FOMC Rate Decision

19:30 USD Yellen Holds Press Conference

(Time zone UTC)

Yesterday’s price performance in both EUR/USD and GBP/USD was not to our liking as both currency pairs failed to pick a clear direction despite the broad-based strength in the USD. Technically speaking, the picture has not changed.

GBP/USD: The cable refrained from a break below 1.33 and we currently focus on a price range between 1.3450 and 1.3220. Yesterday’s better-than-expected U.K. inflation data failed to lift up the currency but if investors take profit on dollar positions today, we could finally see some corrective movements driving the pair higher before the holiday liquidity drain.  

EUR/USD: The euro remained well above 1.17 and as long as there is no clear break below 1.1680 the euro could head for another test of 1.1790. Below 1.1680 we focus on lower targets at 1.1640 and 1.16.

We wish you good trades for today.

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We wish you good trades and many pips!

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Euro And Pound Steady Ahead Of FOMC Decision

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Dear Traders,

The British pound stabilized above 1.27 after touching a fresh low at 1.2635 on Friday. It seems that sterling at least temporarily reached bottom after Prime Minister Theresa May’s Conservative Party unexpectedly lost the majority in Thursday’s U.K. election. This makes Brexit negotiations with the EU more difficult, leading to new complications in the U.K. The Bank of England will decide on monetary policy on Thursday but BoE policy makers are in no position to alter their course in the near-term. Sterling traders shall pay attention to the U.K. Consumer Price Index, scheduled for release on Tuesday. As long as GBP/USD trades above 1.27, we anticipate some upward movements towards 1.2850 and possibly even 1.2950. A significant decline below 1.27 could however open the door for further losses towards 1.26 and 1.24.

 

The highly anticipated FOMC decision on Wednesday is expected to end with a rate hike. How the U.S. dollar will trade, hinges however on the Fed forecasts for the second half of 2017. If the Federal Reserve calls for three rate hikes this year despite recent disappointing U.S. economic data outcomes, the greenback could strengthen. However, given the low probability the Fed will embark on an aggressive tightening cycle, traders should prepare for a weakening dollar, especially ahead of U.S. inflation data due to be released on Wednesday.

The EUR/USD traded little changed between 1.1215 and 1.1165. Technically, the recent sideways trading range is still unbroken and as long as there is no breakout either above 1.1285 or below 1.11, there is nothing new to report.

From the Eurozone, the most important piece of economic data will be the German ZEW survey scheduled for release on Tuesday morning.

 

With no major market drivers and given the typical seasonal lull in market activity, we do not expect exaggerated currency moves.

Daily Forex signals:

 

Additional daily and long-term entries are available for subscribers.

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We wish you good trades and many pips!

Any and all liability of the author is excluded.

Copyright © All Rights Reserved 2017 Maimar-FX.

www.maimar.co