EURUSD Prepares for Sharp Volatility as FOMC Looms

Key Points:

• EURUSD facing volatility as U.S. Fed gets set to determine near term rate policy.

• Uncertainty growing due to mixed rate hike messages from the FOMC.

• Consider your current positioning given the difficulty in calling this event.

The Euro rallied strongly throughout most of last week as the pair initially rose in response to some optimistic rhetoric from the ECB’s Mario Draghi. In addition, the EU GDP rose to meet market expectations at 0.4% q/q. Subsequently, the pair was remained relatively robust as it charged higher towards the 1.07 handle. However, the pair is facing an increasingly volatile week ahead as the US Fed gets ready to deliver their verdict on rate hikes. Subsequently, it remains to be seen if the Euro can retain its current lustre as a key risk event looms.

Last week saw the Euro rallying strongly, back above the 100 MA, largely in response to statements from the ECB’s Mario Draghi which was interpreted as highly optimistic for the Eurozone. In addition, the EU’s GDP results proved on target at 0.4% q/q which represents a slight gain from the prior result. However, despite the gains, the pair was expected to decline late in the week in response to a strong U.S. Jobs report.  Fortunately, the release of the U.S. NFP figures proved to be nothing but a bump in the road and the 235k result had little impact on the Euro’s unstoppable rise. Subsequently, the pair closed the week sharply higher at 1.0669 and with price action having broken through the 100 day MA.

Looking ahead, the Euro is likely facing a relatively volatile week with the U.S. FOMC set to decide upon the fate of interest rates. Given the Fed’s recent PR campaign to suggest that interest rates are imminent, the chance of a live meeting is very real. Subsequently, expect to see plenty of volatility around that decision given that most market pundits are predicting no change to the FFR despite increasing rhetoric from the FOMC. In addition, the Eurozone CPI figures are also due out late in the week and are likely to have an impact on the pair’s direction, therefore, keep a watch for any surprises.

From a technical perspective, the Euro’s rebound and break of resistance at 1.0630 suggests that the medium term pullback has now completed. In addition, the RSI Oscillator is trending steadily higher, within neutral territory, suggesting that there is further room to move on the upside. Subsequently, our initial bias for the week ahead is bullish with targets set at the top of January’s high around the 1.0800 handle.  Support is currently in place for the pair at 1.0491, 1.0454, and 1.0364. Resistance exists on the upside at 1.0700, 1.0828, and 1.0872.

Ultimately, the week ahead is likely to be all about the U.S. Fed’s decision on interest rates. Currently there is plenty of uncertainty sweeping the market which means, regardless of the decision, we are likely to see plenty of volatility during the event before the pair returns to an upward trajectory. However, all bets will be off if the central bank surprises us all and raises rates as this would lead to an immediate Euro depreciation. Subsequently, consider your positioning because this is one of the toughest FOMC meetings to correctly call for some time.