|

FOMC meeting: it's not about the rate hike, it's about hints

Yellen and Co. have largely anticipated a rate hike for this Wednesday, but will they deliver? Fed's decision rests on two legs: employment and inflation. As for the first, data released last Friday paved the way for such move, as the economy added more jobs than expected whilst the unemployment rate remains near record lows of 4.7%, below policymakers' minimum target. Inflation is as near as it could be to the 2% target for the first time in five years, with the PCE index reaching 1.9% yearly basis last January.

Still, will the Fed raise rates tomorrow? Investors believe so and have priced in a 25bps raise, as the risk is now that the economy falls behind the curve, with inflation rising too fast, too much. Being that the case a rate hike seems pretty much granted, triggering then, the next question: how would the market, and particularly the USD, react to the hike?

Before answering that question, let's agree that the hike will be of 25bps. The scenario would change completely if the Federal Reserve announces a half point raise, as such news will catch the market off guard, and the dollar will probably skyrocket across the board, alongside with any other USD-related asset. So, we have the Fed with a 0.25% hike, already priced in. Therefore, dollar's direction will depend mostly on what head's Yellen says about next move.

The market believes that there will be two, maybe three hikes this 2017. With the first coming in March, odds for three moves this year are higher, but Yellen needs to confirm it, maybe hinting that the Central Bank will pull the trigger again next summer, something that will back the case for a stronger dollar. But there's not much more policymakers can do at this point.

In the opposite case, meaning Yellen being cautious about what's next, and giving unclear signs on the next hike, there are strong chances that the market will react as it did during the last two Fridays, selling the greenback in a "buy the rumor, sell the fact" move.

The BOJ and the BOE will come after the FED, but by the end of the week, and once all its digested, market's attention will likely return to political woes, both in the US and Europe.

EUR/USD technical outlook, levels to watch      

The EUR/USD pair has been trading between 1.0500 and 1.0700 since early February with uncertainty limiting the pair's move. Some of the mist will be cleared by the US Central Bank, and the pair can break out of the range, although a sustainable follow-through is unlikely for the second quarter of 2017, unless the Fed delivers some wild surprise, such as remaining on hold, or rising rates by 0.50%.

The pair trades at the higher end of the mentioned range, which means that in the most optimistic case of a dollar rally, it can fell down to 1.0490 this Wednesday. A break below the level will see next support around 1.0440, while below this last, 1.0340, the multi-year low posted last January comes next. To the upside, 1.0720 has contained rally, with large stops suspected a handful of pips above it. If those stops are triggered, then 1.0820, the 50% retracement of the post-US election decline is the next bullish target. Above it, the recovery can extend up to 1.1000 during the following sessions.

Author

Valeria Bednarik

Valeria Bednarik was born and lives in Buenos Aires, Argentina. Her passion for math and numbers pushed her into studying economics in her younger years.

More from Valeria Bednarik
Share:

Editor's Picks

EUR/USD stays defensive below 1.1900 as USD recovers

EUR/USD trades in negative territory for the third consecutive day, below 1.1900 in the European session on Thursday. A modest rebound in the US Dollar is weighing on the pair, despite an upbeat market mood. Traders keep an eye on the US weekly Initial Jobless Claims data for further trading impetus. 

GBP/USD holds above 1.3600 after UK data dump

\GBP/USD moves little while holding above 1.3600 in the European session on Thursday, following the release of the UK Q4 preliminary GDP, which showed a 0.1% growth against a 0.2% increase expected. The UK industrial sector activity deteriorated in Decembert, keeping the downward pressure intact on the Pound Sterling. 

Gold sticks to modest intraday losses as reduced March Fed rate cut bets underpin USD

Gold languishes near the lower end of its daily range heading into the European session on Thursday. The precious metal, however, lacks follow-through selling amid mixed cues and currently trades above the $5,050 level, well within striking distance of a nearly two-week low touched the previous day.

Cardano eyes short-term rebound as derivatives sentiment improves

Cardano (ADA) is trading at $0.257 at the time of writing on Thursday, after slipping more than 4% so far this week. Derivatives sentiment improves as ADA’s funding rates turn positive alongside rising long bets among traders.

The market trades the path not the past

The payroll number did not just beat. It reset the tone. 130,000 vs. 65,000 expected, with a 35,000 whisper. 79 of 80 economists leaning the wrong way. Unemployment and underemployment are edging lower. For all the statistical fog around birth-death adjustments and seasonal quirks, the core message was unmistakable. The labour market is not cracking.

Sonic Labs’ vertical integration fuels recovery in S token

Sonic, previously Fantom (FTM), is extending its recovery trade at $0.048 at the time of writing, after rebounding by over 12% the previous day. The recovery thesis’ strengths lie in the optimism surrounding Sonic Labs’ Wednesday announcement to shift to a vertically integrated model, aimed at boosting S token utility.