The Effect of FOMC Expectations on EUR/USD

April 27, 2016

Image: Pexels

I was searching for a worm coming out of an AAPL to use as today’s featured image, but when I saw this one I couldn’t not use it. I’m an Android guy anyway!

The Effect of FOMC Expectations on EUR/USD:
While the US Federal Reserve releases their interest rate decision tomorrow morning Sydney time, the two-day meeting they have before the release has actually seen them in Washington since yesterday.

When will they hike again is the question on everyone’s lips and with no press release scheduled for this month’s meeting, the trading volatility is likely to be more immediate as it’s all down to the decision itself and statement. No sound bites to be interpreted, just a number and some written text.

“USD Federal Funds Rate: <0.50% expected and <0.50% previously"

Everyone is in the same boat, expecting that we are going to get a no change in rates, and a no change in rhetoric or member’s voting. And what happens when expectations are all set in the same stone? Trading opportunity!

Lets take a look at some charts:

EUR/USD Daily:
160427_eurusd_daily
Click on chart to see a larger view.

The first ‘x’ shows price having pushed into higher time frame resistance and come back down again. We then got the Mario Draghi Thug Life push back to retest the bottom of that level at ‘x’ number two, with the daily long wicked candle possibly signalling that the buyers are cooked.

Fundamentally, if the Fed shocks then it will be with immediately hawkish rhetoric: That’s bearish EUR/USD. We’ve just looked at the technicals above and feel bearish anyway. If price is in a down trend, it’s at higher time frame resistance, AND is failing at the first re-test of lower time frame resistance, then I just can’t mount a technical argument to buy.

So the technicals are bearish EUR/USD and you think the greatest risk with a shock would be bearish EUR/USD, the last thing to ask is has price come down a lot heading into the meeting which could signal some serious pricing in of the risk? This is the impossible answer and where a trader’s skill comes into it, but the obvious answer is no. Price is still close to higher time frame resistance and is actually creeping up into the decision.

If the Fed delivers a dovish tone as expected, is there much upside into this daily resistance level that traders will be willing to sell into? No. On the other hand, if the Fed shocks to the hawkish side, look at that clean white space on your chart before you reach the bottom end of the daily range.

As traders, weigh up the risk:reward of a hawkish shock and then decide whether playing on stretched market expectations is worth it or not.

———-

Chart of the Day:
It just happened to be today that Apple, Twitter and some of the other big boys also all released earnings results. Apple was hit hard after posting a quarterly revenue drop for the first time in more than ten years and offered equally as poor projections. Seems like there is only so many times people will buy a smaller, longer, whatever, variation to their already amazing smart phone.

With the SP500 stock index sitting at major weekly resistance close to all time highs, the misses by huge components of the index is obviously bearish and the charts reflect this fact.

S&P 500 Weekly:
160427_sp500_weekly
Click on chart to see a larger view.

The weekly shows a confluence of both trend line and horizontal resistance at the highs.

S&P 500 Hourly:
160427_sp500_hourly
Click on chart to see a larger view.

While zooming into the hourly chart with some graffiti on top of it is trying to highlight the fact that price has pushed into higher time frame resistance and failed, before again failing on the first re-test of short term resistance.

A similar setup to EUR/USD above and one that is still very much in play if the Fed plays nicely tomorrow morning.

———

On the Forex Calendar Wednesday:
AUD CPI q/q

GBP Prelim GDP q/q

USD Crude Oil Inventories
USD FOMC Statement
USD Federal Funds Rate

Do you see opportunity trading Forex or Indices with Vantage FX? Take advantage on your own instant $50,000 Forex demo account.

Dane Williams – @VantageFX

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