EUR/USD and GBP/USD Getting Ready for the FOMC Risk

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EUR/USD and GBP/USD Getting Ready for the FOMC Risk

The USD has been consolidating in October, giving back some of its gains during the past few months. This week, the FOMC can give it a jolt. It is expected to completely taper QE. It is also not expected to change its forward guidance, though economic data has caused concern that Yellen might deliver a more cautious tone, which would suggest a possible delay in the rate hike. Essentially, there are 2 most likely scenarios.

(1) QE removal, no change in forward guidance.
(2) QE removal, forward guidance suggests a delay (later than mid-2015.)

Let’s see how the EUR/USD and GBP/USD are setting up ahead of the FOMC risk.

EUr/USD rallied from 1.25 to 1.2887 then retreated. It looks ready for bearish continuation, but has again rallied from 1.2613. This rally looks vulnerable, like a flag pattern, getting ready for another bearish continuation attempt.

EUR/SUD 4H Chart 10/29
eurusd 4h chart 10/29
(click to enlarge)

For scenario (1), a break below 1.27 would be likely, and this would signal bearish continuation as price falls below the cluster of SMAs, and the flag pattern. This scenario first opens up 1.26-1.2613. But has potential of pushing EUR/USD back to the 1.25 low on the year. However, because this is the highly expected scenario, we should anticipate a pullback. If price can hold below 1.27, then we can be more confident of the bearish continuation scenario.

For scenario (2), a break above 1.28 with a subsequent hold above 1.2750 should signal further bullish correction, with the 1.2887-1.29 level in sight in the short-term, and with risk of further upside toward 1.30.

GBP/USD 4H Chart 10/29
gbpusd 4h chart 10/29

(click to enlarge)

GBP/USD has shifted into a neutral-bearish mode in the 4H chart during October. It is neutral as it trades in the middle of the SMAs, and the 4H RSI has not directional bias. However, the fact that the prevailing trend before October was bearish, and the fact that price is holding below the 200-period SMA suggests there is some bearish bias.

Now, price has rebounded from 1.60, and is testing the 1.6183 resistance pivot. In scenario (1), the USD is likely to remain strong. GBP/USD will need to break below 1.6075 to clear below the SMAs and the triangle support seen in the 4H chart. That would revive the downtrend and open up the 1.60 level in the near-term, with potential of falling back to the 2014-low of 1.5875.

In scenario (2), GBP/USD is likely to really, and a break above 1.6185 should first open up the resistance pivots in the 1.6225-1.6250 area. Then if price can hold above 1.61 on a pullback, the bullish correction scenario would still be in play with the 1.64 level in sight. In the daily chart, we can see that this scenario would break above a falling trendline, another strong reason to anticipate a push toward 1.64.

GBP/USD Daily Chart 10/29
gbpusd daily chart 10/29
(click to enlarge)

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Fan Yang has been a professional forex trader and analyst since 2007. He specializes in technical analysis and has a Chartered Market Technician designation since 2011. He was the chief technical strategist at CMSFX He was also the founder and chief currency strategist at FXTimes Over the years, Fan has not only been a trader and analyst but also an educator. As a proponent of both technical and fundamental analysis in trading, Fan advocates simplicity and discipline as key factors in making trading decisions when faced with so many "clues" and "signals". Currently Fan Yang is the chief currency analyst and webinar instructor at forexminute.com.