Forex markets brace for crucial Fed meeting on interest rates
The Federal Open Market Committee meets on Wednesday to decide on US interest rates with the general consensus for no move at this meeting, which is likely to be relatively USD neutral given there are still some expectations for a rate rise next month.
Though the USD index has recovered to around 94.60 following a low of 92.00, the period of strength for the Greenback might be nearing its end, particularly if there is only one or at most two more rate rises to come this year / early next year. But in the short to medium term there is still some scope for gains.
The very poor May Non-Farm Payrolls number coming in at just 38,000 (though the ADP private sector payrolls number was a much, more positive 173,000) and the with the UK’s vote on whether to stay in the EU on June 23 – there’s ample reason for the US Federal Reserve to stand pat on Wednesday.
For the July meeting the outlook is a little more uncertain, which is supportive for USD. Providing the UK decides to stay in the EU, an outcome betting shops see a 65-70% probability of happening, and US June Non-Farm Payrolls show some recovery, also likely, then a rate rise could still take place on July 27. Currently, a July rate rise is seen as a 35% probability of happening, versus 5% for June.
Of course if the UK did vote to leave the EU and the much anticipated eruption in financial market volatility followed, then a US rate rise could be off the cards for some time and USD along with JPY would likely rally on their safe-haven status.
Meanwhile, the Fed has been explicit in its desire to gradually normalise US monetary policy and is waiting for the right economic numbers to justify its actions.
Given a June rate rise is very unlikely, it will be important to pay close attention to the wording of the FOMC statement as it might give clues as to what needs to happen for a July or September rate hike to happen.
TECHNICAL ANALYSIS: EUR/USD – Downtrend could be set to resume
The weak US jobs number predictably winded USD, sending the EUR higher, but towards the end of last week the EUR started ceding ground to the Greenback – a process that could well carry on next week.
The support levels to watch out for, come to the fore around 1.1198, 1.1112 and ultimately down to 1.0869 – Wednesday’s FOMC statement could be decisive on whether that happens or not. There is also a trend line to watch out for, which could provide some short-term support (see chart).
Meanwhile, the slow stochastics indicator has a strong sell signal on EUR/USD and with the RSI hovering around a very neutral reading of 50 and the pair in the middle of their Bollinger bands suggests there should be little support to hold back a further fall.
However, news can easily disrupt a trend and should that occur next week then resistance should be seen around 1.1354, 1.1391 and 1.1415. Going into the FOMC see statement, forex markets are likely to quieten down considerably.
By Justin Pugsley, Markets Analyst MahiFX