FOMC: USD, JPY and Euro Facing Big Questions

2017-05-03 13:30:00

Talking Points:

- This afternoon at 2PM ET brings another Federal Reserve rate decision. There’s no press conference scheduled for this meeting nor are we receiving updated economic projections, and there is little expectation for any actual moves.

- The previous Fed meeting in March brought a rate hike; and the next Fed meeting in June may bring another rate hike. What the Fed says here in May can be critical for near-term rate expectations and, in-turn, price action in the Greenback.

- If you’re looking for trading ideas, check out our Trading Guides. And if you’re looking for ideas that are more short-term in nature, please check out our IG Client Sentiment Indicator.

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This afternoon at 2PM ET brings another rate decision from the Federal Reserve. This is the first meeting since the bank’s March rate hike, but unlike March, there is no press conference scheduled nor are new economic projections being released; for that we have to wait until June 14th. Speaking of June, this is the next likely spot for an actual rate hike from the Fed. Markets are holding minimal expectations for this afternoon’s meeting, and seeing the Fed hike at a non-press conference meeting so quickly after hiking rates in March would certainly take many by surprise. So, today is all about the details, and it’s all about the reaction. Earlier, we discussed Gold prices and a key support level that may offer reversal potential. Below, we delve into three of the more interesting price action setups to follow around this month’s Federal Reserve rate decision.

Will the USD Range Finally Yield?

The Greenback gapped-down after the first round of French elections two-and-a-half weeks ago, and since then has battered back-and-forth in a relatively-confined range. There is still unfilled-gap here, but each time price action has made an upward-ascent, sellers have come back in to offer prices-lower.

Chart prepared by James Stanley

If price action in DXY can break-above 99.33, the door could be opened to near-term bullish strategies in the Greenback; and if DXY can catapult back-above the 100-level, bullish strategies in the Greenback could even become attractive for intermediate or longer-term strategies.

Will the Yen Weakness Remain as a Pervasive Theme?

While the U.S. Dollar has been range-bound since French elections, the Japanese Yen has been putting in a rather smooth element of bearish continuation. Last week brought another BoJ meeting to the fray, and the bank, as has become usual of recent, made no splashes or grandiose statements while pledging to continue on with their out-sized stimulus program until 2% inflation becomes a realistic objective.

The Yen has put in an impressive run of weakness over the past two-and-a-half weeks, with GBP/JPY crossing back-above the psychological 145.00 level while EUR/JPY has traded above 122.50; and given that these pairs were putting in very bearish moves to as low as 135.50 and 115.00, respectively, not more than three weeks ago, this is indication of just how pervasive Yen weakness has been.

Against the Greenback, the Japanese Yen continues to slide-lower. We’re still within the ‘big’ zone of confluent resistance between 111.61-112.40; but if this afternoon’s FOMC meeting can provide enough motivation for the pair to break back-above this zone, longer-term bullish strategies in USD/JPY, and longer-term bearish strategies in JPY could be favored.

In yesterday’s strategy planning article, we looked at how traders could trade USD/JPY within this zone of resistance by focusing on the levels within the zone. After another ‘s1 support check’, prices have moved-up to make another higher-high

Chart prepared by James Stanley

Will EUR/USD Finally Post a Concerted Break of 1.0933?

EUR/USD has spent most of 2017 rallying. And this is in a backdrop that’s seen a persistently-hawkish Federal Reserve hike rates while the European Central Bank has tried to remain loose and dovish. As recently as last week, the head of the ECB, Mr. Mario Draghi, said that the bank hadn’t yet discussed exit strategies from their QE program. But judging by price action in Euro-markets, participants are already plotting for the eventual exit from QE as the Euro has been rather bullish against most currencies.

In the U.S. Dollar, a bullish channel has built as EUR/USD has stepped-higher along a Fibonacci retracement that can be found from the post-Election move in the pair. At 1.0933, we have the 61.8% retracement of that move, and for the past two-and-a-half weeks, this level has offered numerous iterations of resistance:

Chart prepared by James Stanley

On the hourly chart below, we can see the combination of higher-lows coupled with slightly lower-highs; producing what is, in essence, a pennant formation after a bullish gap-move around French elections. While bull pennants would normally be treated with a top-side bias, the fact that we’re sitting very near a likely-driver for the pair behooves caution. But the continued respect of 1.0933 further highlights the attractiveness of the level as the lower-highs have continued to taper-down around this price; and if this afternoon’s FOMC meeting can give a bearish-burst to the Greenback, EUR/USD may finally be able to clear this resistance.