USD-Weakness Ahead of FOMC
EUR/USD has been consolidating with a low at 1.2860 and resistance around 1.2988. As we got into the 9/16 US session, traders are fading USD-strength across the board, and the EUR/USD was able to crack this consolidation resistance, officially forming a price bottom ahead of the FOMC risk tomorrow (9/17).
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With price bottom in place, the next resistance could be in the 1.31-1.3116 area. If we take the width of the price bottom (about 128 pips), and project it from the resistance of 1.2988, we would get 1.3116. 1.3110 was the support pivot of a mini consolidation at the beginning of September.
Just remember, that the current rally, a general USD-weakness today can very likely be attributed to unwinding of short positions ahead of tomorrow’s Federal Reserve Bank monetary policy meeting and the subsequent press conference.
Fed Chairwoman Janet Yellen. Source: Flikr
Investors are expecting the FOMC to raise rates mid-2015. Q2 data have been impressive, but Q3 data have relatively leveled off a bit, but still reflects an underlying economic recovery. Thus, we probably won’t get any indication of an earlier rate hike. There will likely be further tapering as the QE program stands at $15B at the moment. Perhaps, a complete reduction will give the USD-strength because the FOMC has been consistently shaving off the bond purchasing program by $10B each time. But more importantly traders might be monitoring Yellen’s language regarding monetary policy. She has been saying the the bank still needs considerable amount of time before raising rates. But if she does not use the word “considerable”, traders might assess the speech as hawkish.
A hawkish FOMC statement would in turn continue to pressure the EUR/USD. When we look at the weekly chart, we can see that there is still room to fall until the 1.2745 support and 2013-low. However, if price cannot break below 1.2873 even with a hawkish statement, we can probably expect a meaningful consolidation, with some short-term bullish outlook.
A dovish statement might be tricky to deal with because the prevailing EUR/USD trend is bearish. We might be able to expect some bullish risk toward 1.32, but it might be premature to call for a bullish correction above that unless we start seeing 1.30 holding as support after a few jabs at it. Even a rally to 1.32 might need some confirmation of price holding above 1.30.
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