Fed preview: what to expect of EUR/USD?

The EUR/USD pair is moving sideways ahead of the Federal Reserve statement, in a modest range. The decision according to market consensus will be to keep rates and monetary policy unchanged. So the uncertainty is about the tone and the words of the statement.

The euro is trading flat on Wednesday against the US dollar, hovering around 1.1000. Earlier it attempted to rally but quickly it was stopped below 1.1010 while the downside found support above 1.0980.

Since July 15 the pair is moving with a bearish bias, but it has fallen no more than 150 pips. On Monday price approached the key support located near 1.0910, but it bounced to the upside.

Trade July 27 Federal Reserve interest rate decision - Live Coverage

What to look for in the Fed statement?

If the US central bank as expected leaves rates unchanged, traders will look for clues about the odds of a rate hike in the coming FOMC meetings. How are they going to find them if there are no explicit mentions?

One option is to look at the outlook of the FOMC about the jobs market, activity, inflation and global developments. A significant improvement in many of these factors could increase market expectation of a rate hike, maybe at the next meeting (September 21) or later. Greenback would benefit from these type of words and it could push EUR/USD below 1.0950 (weekly low) to test 1.0910 (post-referendum low); a break lower could open the doors for more losses. Also if there are many dissenters in the decision, asking for a rate hike, that could send some signal to the markets.

On the other side, it the statement shows: big concerns about the global outlook (low growth and/or Brexit), a subdued inflation and growth expected trajectory and presents a weaker labor market, then it is likely that the next rate hike (after the one it took place December 2015) will have to wait a little longer. Lower rate hike expectations could push EUR/USD sharply higher, to test 1.1050, 1.1100 and even 1.1150/70 (post-referendum high).

The statement is likely to be between both scenarios, but investors will decide where the US dollar goes by the change in their perspectives of when the Fed will raise rates.