Analysis

FOMC meeting: it's not about the rate hike, it's about hints

Yellen and Co. have largely anticipated a rate hike for this Wednesday, but will they deliver? Fed's decision rests on two legs: employment and inflation. As for the first, data released last Friday paved the way for such move, as the economy added more jobs than expected whilst the unemployment rate remains near record lows of 4.7%, below policymakers' minimum target. Inflation is as near as it could be to the 2% target for the first time in five years, with the PCE index reaching 1.9% yearly basis last January.

Still, will the Fed raise rates tomorrow? Investors believe so and have priced in a 25bps raise, as the risk is now that the economy falls behind the curve, with inflation rising too fast, too much. Being that the case a rate hike seems pretty much granted, triggering then, the next question: how would the market, and particularly the USD, react to the hike?

Before answering that question, let's agree that the hike will be of 25bps. The scenario would change completely if the Federal Reserve announces a half point raise, as such news will catch the market off guard, and the dollar will probably skyrocket across the board, alongside with any other USD-related asset. So, we have the Fed with a 0.25% hike, already priced in. Therefore, dollar's direction will depend mostly on what head's Yellen says about next move.

The market believes that there will be two, maybe three hikes this 2017. With the first coming in March, odds for three moves this year are higher, but Yellen needs to confirm it, maybe hinting that the Central Bank will pull the trigger again next summer, something that will back the case for a stronger dollar. But there's not much more policymakers can do at this point.

In the opposite case, meaning Yellen being cautious about what's next, and giving unclear signs on the next hike, there are strong chances that the market will react as it did during the last two Fridays, selling the greenback in a "buy the rumor, sell the fact" move.

The BOJ and the BOE will come after the FED, but by the end of the week, and once all its digested, market's attention will likely return to political woes, both in the US and Europe.

EUR/USD technical outlook, levels to watch      

The EUR/USD pair has been trading between 1.0500 and 1.0700 since early February with uncertainty limiting the pair's move. Some of the mist will be cleared by the US Central Bank, and the pair can break out of the range, although a sustainable follow-through is unlikely for the second quarter of 2017, unless the Fed delivers some wild surprise, such as remaining on hold, or rising rates by 0.50%.

The pair trades at the higher end of the mentioned range, which means that in the most optimistic case of a dollar rally, it can fell down to 1.0490 this Wednesday. A break below the level will see next support around 1.0440, while below this last, 1.0340, the multi-year low posted last January comes next. To the upside, 1.0720 has contained rally, with large stops suspected a handful of pips above it. If those stops are triggered, then 1.0820, the 50% retracement of the post-US election decline is the next bullish target. Above it, the recovery can extend up to 1.1000 during the following sessions.

 

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