FOMC May Be Hawkish or Dovish Today, But Odds Are Still With EUR Strength

The Fed is under pressure. Inflation is at 1.6% (yoy) which is below the targeted rate of 2%. Moreover the inflation rate has been increasing at a decreasing rate since February this year. Consider the following chart:

The July forecast is 1.7%. The Fed has a fine balancing act to follow now. If Chair Yellen is more hawkish it is bound to be good for the dollar, but there are ramification for choosing a hawkish tone. Simple economics dictates that as the price of money increases, disposable income drops which will impact demand. Therefore to reach their target of 2%, and if hawkish tones are delivered, it seems that the Fed is banking on the supply side to deliver here. This seems strange because cost pressures are generally low.

Let us examine the EURUSD on a number of timeframes to assess, given the state of US inflation.

Monthly

• Price has overcome the April 2016 high.

• The shorter term red moving average is above the longer term blue moving average.

• There is good angle and separation between these moving averages indicating a strong trend up.

Weekly

• The last weekly swing point high was for the week ending 26 March 2016 (red down arrow).

• This was surpassed by the gap up in the pair following Macrons win in the first round of the French election.

• There has been a very strong trend up ever since.

4 Hour

• There was a strong impulse move up (marked 1-2).

• Subsequently there has been a corrective move down (marked 2-3??)

• I have inserted the “??” after the 3 because the question is has the corrective leg concluded and is the next impulse move up about to begin?

• The 2-3 correction has retraced 38% of the previous impulse move and there is strong candle action at this level (although the time frame is yet to conclude).

Conclusion

So we see that the market is not convinced that the US target inflation is easily attainable because if it was then surely there would be a modicum of USD strength. This is not the case. If Chair Yellen comes out hawkish today then the 2-3 correction will extend lower and potentially bounce off of another Fibonacci retracement level (50%?, 61.8%?). If she is dovish we should see a bounce off of the 38% level in favour of the bulls.