Fed meeting will decide on whether the Dollar will break higher or lower

General market theme
The US Dollar remains at the centre of attention this week ahead of today’s FOMC meeting on monetary policy, a meeting that is eagerly expected by traders around the world. The importance of this meeting is clear: market participants need to assess whether the Fed will remain on schedule with their tightening plan and if they lower their expectations for 3 more rate hikes this year how many should we expect?

It is without doubt that the beginning of the year wasn’t what the Fed expected and their initial plans for 3 more rate hikes within 2016 might be out of the question now. However it is important to see whether the central bank is aiming for 1,2 or 3 hikes by the end of the year, if it’s 3 then the Dollar will soar higher while 1 will send the US currency significantly lower. The most likely scenario of 2 rate hikes will initially weaken the Dollar but we should expect a recovery after that as traders will focus on Fed’s confidence on the domestic currency.

Price action highlights
The Euro traded sideways ahead of the Fed meeting remaining around the 1.1100 area keeping a tight trading range on either side of this important level. The reduced volatility and participation reveals how important the Fed meeting is for traders as they prefer to remain neutral ahead of it, the decisions and press conference that will follow will dictate the Euro’s medium-term outlook hence traders remain cautious. A break lower will target the 1.1000 area at first while to the upside we need to focus on the 1.1180 area for our first target.

The Cable has been under pressure since the beginning of the week as new concerns have risen regarding the upcoming Brexit referendum. A new poll published on a major newspaper in the UK revealed the 52% of the voters are in favor of exiting the European Union and even though analysts believe that the poll results might be skewed it still shows that the risk is still there. The Pound traded down to 1.4100 and should the Dollar be in play today we could be seeing further decline towards the 1.4000 level of support.

Focus of the day
It goes without saying that the event of the day is the FOMC meeting and Yellen’s press conference after that, however earlier in the day the Pound will be in play with the release of the employment data and Osborne’s budget speech to the Parliament. Before the Fed event the inflation levels from the US will also be released but we expect the market to have focused on the key event of the day by that time.