FOMC meeting: dovish hike or hawkish surprise?

Hoping for fresh cues on the future of monetary policy, the market heads into the June FOMC meeting having priced in a 25 bps hike in the Federal Funds' Rate. Yellen & Co. have spent the first half of this 2017 anticipating three rate hikes for this year, just having provided the first last March. The move, also widely anticipated by financial markets, took the overnight funds rate to a target range of 0.75% to 1% and set the path for regular hikes ahead until full normalization, somewhere around 3%-4%, where the Fed believes will be consistent with a neutral stance on monetary policy.

Something, however, began to change in March, as the Fed brought to the table the balance sheet. Large-scale assets purchases over the last years left it at $4.5 trillion, far beyond needed to support US reserves needs. Back then, policymakers introduced the idea of beginning shrinking the balance sheet sometime this year, becoming a new line in their usual jawboning.

The thing is: what will the Fed do next? As macroeconomic data has been steadily softening ever since 2017 started, the job's sector is still performing above expectations, with the US economy close to full employment. Inflation, however, has been mixed, and despite higher, far from stable at Fed's 2% target. Overall, and despite odds for a rate hike are high, the market expects it to be accompanied with a dovish statement, and the central bank reaffirming its dependence on macroeconomic data.

Beyond Yellen's wording, the market will be also closely scrutinizing the dot plot, as if it reflects fewer hikes in the future, the Dollar will plummet. Chances of the contrary are pretty much null at the current scenario, but it will be the hawkish surprise the market needs to rush into buying the greenback. The next question is, then: could Dollar's gains be sustainable in time after the initial excitement?

Well, leaving aside that chances of a hawkish stance are limited, the fact is that even in that case, the dollar has little room to keep strengthening in time, with two main issues in the way: one, inflation lack of stability, and two, Trump's political woes. Without getting into the latest scandals, the US president is still to fulfill his promises on taxes and investment. Given that the tax reform is expected to get into the Congress this summer, seems more than likely that solid dollar buying won't occur until then.

EUR/USD technical outlook, levels to watch      

From a technical point of view, the pair retains its bullish stance, given that in the weekly chart, the pair holds right below the 1.1300 figure, the high printed as an immediate reaction to Trump's victory last November. That's the immediate critical resistance, as over these past 4 weeks, large stops should have gathered above it, alongside with buying orders  that if triggered, can send the pair close to 1.1460, a huge line in the sand, as weekly basis, the pair has been unable to settle above it since January 2015.

In the daily chart, technical readings have become neutral, with indicators stuck around their midlines and the price right below a horizontal 20 SMA. A strong support comes at 1.1110/30, where the pair has met buying interest on slides, with a stronger one at 1.1075, the low set on April 18th. Only below there, the pair could be able to correct further lower, with the 1.1000/20 area as the first support, and followed by 1.0930, the 61.8% retracement of the November/March decline.