EUR/USD Forecast: and here comes the Fed…

The EUR/USD pair eased this week, but not by much, holding, however, below the 1.2000 threshold pretty much since it started. The pair fell down to 1.1837,  a lower low weekly basis, but trimmed most of its losses as the greenback can't find its footing.

The main macroeconomic event of the week, was indeed US CPI, and the reason why the pair fell to the mentioned low. According to the official report, consumer prices accelerated in August, backed by an increase in the cost of gasoline. Inflation was up in the month by 0.4%, following a 0.1% advance in July, while yearly basis, CPI remained unchanged at 1.7%, but above market's expectations of 1.6%. The positive headline triggered a short lived rally, mostly because of two reasons: one, Fed's favorite inflation measure is the  PCE, not the CPI. And such measure has fallen from 2.2% in February to 1.4% in July. Second, within the release, there were a couple of worrisome lines, outstanding the fact that, adjusted by inflation, hourly wages fell 0.3% in the month. Slow growth in salaries has been a drag for inflation ever since the year started, and the main reason why the market believes the Fed will do little tightening this year.

Also backing the greenback mid week, was speculation that the US government will finally focus on the growth agenda, as US President Trump urged Congress to work in the tax reform, whilst House Speaker Paul Ryan said that a plan from Republicans would be release by the end of the month. Although there were no details on the matter, it helped keep the greenback afloat.

And here comes the Fed. The US Central Bank is having a "live" monetary policy meeting this upcoming week, those that include new forecasts, the dot-plot, and a press conference afterwards. September was expected to be the time of a third rate hike at the beginning of the year, but softer inflation these last few months have diluted such chances. The market is actually expecting an on-hold stance on rates,  and hoping for a raise next December.

Some "hawkish" action can be seen this time, as the market is anticipating that the Fed will give clear signs of how and when it will start unwinding its balance sheet.  Additionally, the dot-plot will provide a clearer outlook of when policymakers may pull the trigger again.

Anyway, let's assume that a rate hike is still up for December, and that the Fed gives clear answers on the how and when they are going to reduce their balance sheet. Would that be enough for the greenback? I don't think so. Over these last few years, we learned that theirs is a huge gap between what the Fed plans to do, and what it actually does. Furthermore, dollar´s strength came as a result of Trump promises of a tax reform and infrastructure investment and little progress has been made there. In fact, none.

Indeed, the greenback can get a boost, but it's still to be seen if gains will be sustainable. And that only in the case of a really hawkish Fed. In the meantime, and despite unable to regain the 1.2000 level for now, things the EU economy is doing pretty good, and the ECB is one step closer to begin tapering QE.

From a technical point of view, the long term picture is still bullish, and this past week behavior seems to be the result of a wait-and-see stance ahead of bigger news next one. The weekly chart shows that the pair remains far above all of its moving averages, with the 20 SMA extending its advance beyond the 100 SMA and nearing the 200 SMA, this last around 1.1730 and a line in the sand, as bulls will likely retain the lead as long as the price remains above it. Technical indicators in the mentioned chart remain within overbought territory, in a consolidative phase and diverging modestly from each other, far from confirming  a top has been reached.

Daily basis, the price is ending this Friday above a bullish 20 SMA after a dip below it on US CPI and tax reform headlines, whilst technical indicators have turned sharply higher, entering positive territory and maintaining their bullish slopes.  

The pair has an immediate resistance around 1.2030, followed by January 2015 high at 1.2101. Steady gains above the level should see the pair accelerating north, with dollar bulls probably giving up. The 1.2220/40 area comes next, en route to the 1.2330 price zone, where the pair had multiple monthly highs and lows from the past decade. Supports on the other hand, are located at 1.1870, and 1.1820, with a break below this last exposing the 1.1700/30 region.

According to the FXStreet Forecast Poll, sentiment towards the greenback is mixed, but is mostly seen down against its major rivals. In the case of the EUR/USD pair, bulls  and bears account for 46% each, with the pair seen average at 1.1970. Longer term, the dollar gets some favor, with increasing bullish pressure in the 1 month view, but decreasing for the quarter, as last week, bears were 62%, with an average target of 1.1855, and now stand at 60%, aiming for the same target.

BOE's hawkish surprise has catch investors off guard, and left the forecast a bit out of date particularly in the short term, and when it comes to banks' views. Overall, a bullish extension is expected on sustained gains beyond 1.3600, but for next week, 64% of the analysts polled expected a pullback towards the 1.3400 price zone. In the longer outlook, the numbers of bears increased from 44% to  70% but the average target surged by over 200 pips, from 1.2953 to 1.3168, a sign that the market is somehow less concerned over the Brexit outcome.

When it comes to the USD/JPY pair, the pair is seen falling next week, but speculative interest still sees the pair holding above 110.00. Bears are a majority weekly basis, but down from previous week  82% to a current 46%, now targeting average 110.37. In the three months view, the outlook is pretty much unchanged, with the pair seen a handful of pips above 112.00, but bulls down from 68% to 58%.