FOMC Preview: What to expect of EUR/USD?

At 19:00 GMT the Federal Reserve will release its statement with the monetary policy decisions. No change in rates is expected. The tone of the statement could have large market implications. The US dollar is rising on Wednesday, before the decision, on the back of stronger-than-expected US economic data (ADP and ISM). 

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Eyes on statement 

Market consensus points to no change in rates. According to the FedWatch Tool from CME Group, current prices reflect a 96% probability of no change. The odds of a rate hike in March, from the current range 0.50% - 0.75% to 0.75% - 1.00% rise to almost 25%. 

Today’s meeting won’t be followed by a press conference from Janet Yellen and there won’t be updated projections. So, without any surprises, analysts will carefully read the statement, looking for signals for when to expect the next rate hike. 

“Unfortunately the FOMC statements are very static and usually do not change significantly from meeting to meeting so we do not expect much news. The Fed is still waiting for information on 'Trumponomics'”, said analysts at Danske Bank. They expect the Fed to hike twice this year, in June and December, with risks skewed towards a third hike. 

On the same line, analysts from Nomura, expect the FOMC to stand pat at today’s meeting and see only small changes to its statement.

Trade the Feb 1 Federal Reserve interest rate decision - FOMC Live Coverage

Trump effect 

Donald Trump’s policies and statements weighed on the US dollar yesterday, and today, the greenback gained ground on the back of economic data. The current market theme appears to be the uncertainty of Trump’s policies weakening the dollar, and the signals of a stronger economy, strengthening the currency.

“The main determinant of the Federal Reserve’s monetary policy in coming months will be the economic policy of the new administration”, wrote economists from Natixis. 

Going forward, there could also be an impact of Trump over the Fed. Barbara Rockefeller, President at Rockefeller Treasury Services, is warning about Trump and the central bank. “Trump may not do it this time, or next time, or the time after—but it's only a matter of time before Trump throws a bomb at the Fed. It won't be a fire-cracker. Yellen and Co. know it, too.”

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EUR/USD: More correction or rally to resume? 

The pair today is pulling back after trading momentarily above 1.0800 yesterday, at the strongest level in 7 weeks. Th retreat pushed the price below the 1.0760 zone.

An improbable rate hike or a hawkish statement from the Fed, could boost the US dollar and push EUR/USD toward 1.0700. If the decline continues, the key level to watch is 1.0650/60:  a break lower could remove the current short-term bullish bias of the par. 

On the other direction, a dovish statement, would help EUR/USD to rise back above 1.0760/70 and expose again 1.0800. The upside tone would be confirmed and a rally to 1.0850 could be on the cards. Further gains above 1.0850 today, would require a sharp decline of the greenback across the board. 

All eyes on the Fed as USD bulls wary of any dovish tilt