EUR/USD Forecast: Fed´s decision to trim balance sheet failed to impress

The greenback is ending the week with modest gains against most of its major rivals, exception made by the EUR, which refuses to give up, but can't run beyond the 1.2000 threshold. The US Federal Reserve September meeting provided more than what the market was waiting for, yet it fell short from triggering sustained dollar demand.

Beside keeping rates unchanged, as largely expected, the US Federal Reserve it will start trimming its balance sheet next October, in a "gradually and predictably" way according to Ms. Yellen, starting with $10 billion per month, to be increased by another $10 billion each quarter until reaching $50 billion per month. The Central Bank also offered updated economic forecast, showing that policymakers still see likely a third rate hike for this year, and room for three more hikes in 2018. The biggest surprise, which at the end was not that big, is the fact that the Fed still considers possible a December hike, despite stubbornly low inflation. Also, the Fed downgraded its inflation forecast for this year from 1.7% to 1.5%, and upgraded its growth outlook to 2.2%.

Given the predictable pace of reducing the balance sheet, and that a December rate hike is far from granted, the market had second toughs on dollar's strength, further weighed by renewed verbal war between US and North Korea's presidents, menacing each other and trading insults at the end of the week. Is not that the market fears a world war what hits the greenback, but the fact that the US President is putting too much effort in fighting the world, and "forgets" working on the tax reform.

Data coming from the US was generally soft, nothing strong enough to impress speculators, while in the EU, economic growth keeps marching at its fastest pace in six years. However, speculation that the ECB will refrain to kick start tapering, if the pair surpasses 1.2000, limits advances, triggering profit taking around the level.

The technical picture is still long-term bullish, although the pair has been  confined to a well-limited range between 1.18 and 1.21 for a month already, settling mid way around 1.1970. The daily chart shows that the 20 DMA has turned horizontal, in line with the ongoing consolidation, with the price moving back and forth around it. In the same chart, however, the 100 and 200 DMAs maintain their strong upward slopes hundreds of pips below the current level. Also, technical indicators have managed to bounce from their mid-lines, and while below previous September highs, clearly indicate the absence of selling interest. Longer time frames, also indicate that the risk is towards the upside, with the price holding above all of its moving averages in the weekly chart, and with technical indicators there lacking directional strength, but holding within overbought territory.

For the upcoming days, 1.2030 is the immediate resistance, followed by 1.2101, January 2015 monthly high. Steady gains beyond this last could see the pair nearing 1.2300 before a more relevant corrections comes to play.  To the downside, the 1.1900 level is the first support, followed by the 1.1820/30 region, from where the pair bounced multiple times these last few weeks. Below it, 1.1661, August 17th low comes next.

The FXStreet forecast poll shows no clear sentiment towards the dollar. European currencies are seen easing, but the yen and seen gaining, probably backed by risk aversion. In the case of the EUR/USD pair, bears have increased in the shorter time frames under study, although the average targets have barely changed. The negative sentiment is stronger in the 1-month month perspective, with bears not at 65% from previous 59%, whilst by the end of the quarter, the pair is seen around 1.1880, from previous 1.1857, with bears now accounting 56%, from previous 60%.

Seen with perspective in the overview chart, market players have been lifting its average target ever since mid May, but since early September, the curve has flattened, somehow anticipating a probable top for the pair.

Bears are still a majority around the Pound, with the most notable flip in speculative perspective being the 3-month view, as bears increased to 79% from previous 70%, while the average target being downgraded by over 150 pips, now seen at 1.3001. The Overview chart indicates that the spike of optimism seen last August has begun fading, although not enough to suggest a chance in the current positive bias.

Finally, sentiment towards the USDJPY has suffered sharp revisions this week, seen bearish in the 1-week and 1-month perspectives, but with targets around 100 pips higher than those seen last week. In the 3-month view, bulls are still a majority with the 58% with the pair seen little changed, averaging 112.83.