Fed decision preview: What to expect of EUR/USD

FXStreet (Córdoba) – The Federal Reserve concludes its two-day policy meeting at 19:00 GMT and most analysts agree that Yellen and company will raise rates for first time since 2006 as the central bank moves toward policy normalization after the financial crisis required non-standard measures and record low rates.

More than 80% of markets expecting an increase of 25 basis points lifting the target range for federal funds to 0.25% – 0.50%.

Traditionally a rate raise will make the US dollar more attractive for high-yielding seeking investors, but with the lift-off taken as a done deal, most of it has been already priced in by financial markets so in absence of surprises, US dollar reaction could be limited.

Fed Chair Janet Yellen is to hold what will be a press conference 30 minutes after the release of the Fed’s statement. The Fed will also publish updated economic forecasts and a “dot plot” showing FOMC members’ expectations for the pace of future hikes, which could be more interesting for markets.

Many analysts anticipate the pace of further increases to be gradual amid concerns over weak growth abroad and excessive dollar appreciation amid divergent monetary policies between the US and other countries.

What to expect of EUR/USD

In the absence of surprises, a 25 bps rate hike could see the dollar rallying across the board as knee-jerk reaction, although it is hard to say whether gains will be long-lasting as Fed rhetoric will be more important than the decision (assuming the Fed will live up to expectations).

Initial bearish target for EUR/USD is seen at 1.0500, which was low set right before Draghi shocked markets earlier this month followed by 1.0461 (2015 low) ahead of the 1.0335 zone (January 2003 low).

On the other hand, if Fed raises rates but Yellen turns out to be more dovish than expected or the dot plot shows members are in no hurry to continue lifting rates, EUR/USD could rise, with the 100-day SMA at 1.1060 as immediate target and a break above this latter could send the pair quickly to the 1.1350 zone (Oct 23 high).

The Federal Reserve concludes its two-day policy meeting at 19:00 GMT and most analysts agree that Yellen and company will raise rates for first time since 2006 as the central bank moves toward policy normalization after the financial crisis required non-standard measures and record low rates.

(Market News Provided by FXstreet)