Forex: Bearish Euro & JPY Setup in Focus Ahead of FOMC Meeting
- Federal Open Market Committee (FOMC) to Taper Another $10B
- Ben Bernanke Attends Last Meeting as Fed Chairman
Trading the News: Federal Open Market Committee Meeting
The Federal Open Market Committee (FOMC) is widely expected to reduce its asset-purchase by another $10B as the benefits of quantitative easing now outweighs the costs, and the policy outlook may prop up the dollar in February as the central bank moves away from its easing cycle.
What’s Expected:
Time of release: 01/29/2014 19:00 GMT, 14:00 EST
Primary Pair Impact: EURUSD
Expected: $65B
Previous: $75B
DailyFX Forecast: $65B
Why Is This Event Important:
However, we may see a growing number of Fed officials favor a less-aggressive approach in normalizing monetary policy amid the spillover-effects to the global economy, and a material shift in central bank rhetoric may undermine the bullish sentiment surrounding the dollar if the FOMC implements a dovish twist to its forward-guidance.
Expectations: Bullish Argument/Scenario
Release | Expected | Actual |
Advance Retail Sales (MoM) (DEC) | 0.1% | 0.2% |
Unemployment Rate (DEC) | 7.0% | 6.7% |
Gross Domestic Product (Annualized) (QoQ) (2Q F) | 3.6% | 4.1% |
The Fed may adopt a more neutral tone for monetary policy as the central bank anticipates a stronger recovery in 2014, and we may see a bullish reaction in the dollar should the committee lay out a more detailed exit strategy.
Risk: Bearish Argument/Scenario
Release | Expected | Actual |
U. of Michigan Confidence (JAN P) | 83.5 | 80.4 |
Average Hourly Earnings (YoY) (DEC) | 1.9% | 1.8% |
Personal Income (NOV) | 0.5% | 0.2% |
Nevertheless, the FOMC may implement a wait-and-see approach amid the uncertainties surrounding the world economy, and the greenback may face a further decline over the near-term if the central bank shows a greater willingness to retain its highly accommodative policy stance for an extended period of time.
How To Trade This Event Risk(Video)
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BullishUSD Trade: FOMC Delivers Another $10B Taper & Pledges to Stay on Course
Need red, five-minute candle following the print to consider a short EURUSD trade
If market reaction favors a long dollar trade, short EURUSD with two separate position
Place stop at the near-by swing high/reasonable distance from entry; look for at least 1:1 risk-to-reward
Move stop to entry on remaining position once initial target is hit, set reasonable limit
Bearish USD Trade: Fed Keeps QE at $75B; Sees Further Delay in Exit Strategy
Need green, five-minute candle to favor a long EURUSD trade
Implement same setup as the bullish dollar trade, just in opposite direction
Potential Price Targets For The Rate Decision
EURUSD Daily
Chart - Created Using FXCM Marketscope 2.0
Downward Trend Taking Shape Amid Failure to Close Above 1.3800
Bearish Divergence in Relative Strength Index Favors Downside Targets
Interim Resistance: 1.3800 (100.0 expansion) to 1.3830 (61.8 retracement)
Interim Support: 1.3490 (50.0% retracement) to 1.3530 (61.8% expansion)
Impact that the FOMC Interest Rate Decision has had on EUR/USD during the last release
Period | Data Released | Estimate | Actual | Pips Change (1 Hour post event ) | Pips Change (End of Day post event) |
Dec 2013 | 12/18/2013 19:00 GMT | 0.25% | 0.25% | -30 | -133 |
December 2013 Federal Open Market Committee Interest Rate Decision
Despite many market participants calling for the first taper of the Fed’s asset purchase program in March, the FOMC came out with a $10B taper split evenly between Treasury and MBS purchases. The surprise sent USD pairs whipsawing to the up and downside before finally ending in USD strength against the majors. Moving into Wednesday’s January FOMC meeting, it is important to note that the USDollar index is just slightly below where we were at the daily close of the last FOMC day. This is a critical juncture for global markets with emerging market currencies selling off with equities over the past week. If we are to see another $10B taper as expected, extreme volatility and USD strength cannot be ruled out. If the recent selloff and last NFP report force the Fed’s hand and lead the FOMC to delay a January/February taper, the greenback will certainly falter on the back of a dovish Fed decision. Note: there is no February meeting and this will be the last rate decision out of the Fed until March 19th.
--- Written by David Song, Currency Analyst
To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.
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