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FOMC meeting: no game changer for the USD

The US Federal Reserve is undergoing its two-day monetary policy meeting, keeping investors mostly sidelined ahead of the outcome next Wednesday's afternoon as, with few exceptions, major currencies trade within familiar ranges, particularly when it comes to European ones.

The US Central Bank is largely expected to keep rates unchanged after the hike seen last March, with the statement and the following press conference taking center stage, as policymakers seem to be shifting the path of monetary tightening from rates to the balance sheet.

Minutes from the March 15th decision were released early April, indicating that the Fed was still optimistic about the economy, but in no rush of accelerating the pace of rate hikes. Afterwards, FOMC members have focused more on the balance sheet rather than on rates, suggesting that the Central Bank is now centered on reducing it. During the past 10 years, the Fed has added over $4.5 trillion in bonds and mortgage-related securities to its balance sheet.

During March's press conference, Janet Yellen said that changes to the balance sheet depend on the economic conditions, and while latest data is far from suggesting a slowdown, it has been soft enough to suggest the Central Bank may offer a more conservative stance this month. Poor macroeconomic readings have lead markets to doubt that the central bank will raise rates two more times this year, with three "live" meetings ahead that could offer such outcome: June, September and December.

If the bank somehow hints that no changes should be expected for June, the market will likely assume that there will be only chances of just one more rate hike this year, as it seems unlikely that the Fed will raise rates in two consecutive meetings. An already weak greenback will be negatively affected by this outcome.

A hawkish scenario is unlikely, and unless the Fed clearly indicates that two rate hikes are still on the table, dollar gains are likely to be short-lived and limited, not enough to revert the sour tone surrounding the American currency.

EUR/USD technical outlook, levels to watch      

The EUR/USD pair heads into the FOMC meeting trading near its yearly high of 1.0950 achieved after relief came to Europe, following the first round of French election. Political uncertainty has somehow diminished, while inflation in the region surprised to the upside, backing the recent u-turn in sentiment towards the common currency.

The pair reached a major long-term resistance, the 61.8% retracement of the post-US-election decline around 1.0930, with spikes beyond it, up to 1.0950 being quickly reverted but with retracements holding above 1.0820, the 50% retracement of the same decline and last week low. Technical readings in the daily chart show that the price is firmly above its moving averages, with a bullish 20 SMA about to surpass the 200 SMA for the first time since September 2016, whilst technical indicators consolidate within overbought territory, reflecting the latest lack of direction rather than suggesting decreasing buying interest. Overall, the pair is poised to extend its advance, with short-term resistances on a break above the mentioned high, located at 1.1000 and 1.1045. Beyond this last, and with the warning of the NFP in the way, the pair has scope to advance up to 1.1260.

The immediate support comes at 1.0850, but it will take a break below the mentioned 1.0820 to see the pair falling further with scope then to fall down to 1.0730, and fill the weekly opening gap left after the outcome of the French election.

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.

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