Big day with the FOMC rate statement on its way to shake the markets. Ms. USA (US dollar) is very intense, and no European charm from Mr. Euro is holding her nerves down. Heck, Mr. Euro himself seems to be pretty confused about his moves on the forex dance floor. While there are some strong signals pointing to downward movements for the EUR/USD pair, I’m here to tell you to hold off on a trade for now! Here is why:
1- Way too many scenarios for FOMC meeting
The Federal Open Market Committee (FOMC) members may have been enjoying themselves too much pushing the US market in all kinds of directions with their hints and signals about a potential interest rate hike. And the market participants have sure been an engaging audience. Economic data hasn’t been so impressive these days, leading analysts to push back their rate hike expectations, but some FOMC members have been stating that a rate hike is still on the table before the end of this year.
Now the FOMC members are left with only two monetary policy statements on schedule before the New Year Countdown, which makes this October rate decision a highly anticipated one, with way to many scenarios set as a potential outcome:
- FOMC won’t raise rates, but signals 2015 (Semi bullish)
- FOMC won’t raise rates, but signals 2016 (Semi bearish)
- FOMC won’t raise rates, and takes the rate hike off the table (Too damn bearish)
- FOMC actually raises interest rates to 0.25% (Too damn bullish)
An actual interest rate hike tomorrow (despite all the odds) would be very bullish for Ms. USA because that would mean the Fed is very confident in her, and could be taken as a sign of a rise in risk aversion in the current weak global growth environment. Vetoing an interest rate hike all together could mean that the US economy is pretty gloomy and could lead to a sharp US dollar selloff on risk appetite.
Keep in mind that Fed head Janet Yellen won’t be holding a press conference after this month’s meeting. Therefore, there is widespread rumor that the Fed won’t raise rates this week if for no other reason than because Ms. Yellen won’t have an opportunity to further explain the move at a post-meeting press conference.
2- A 100 billion-euro headache
As I covered yesterday, Super Mario hinted last Thursday that he may cut the deposit rate from the current minus 20 basis points level. According to Reuters, this threat by the head of the European Central Bank to push interest rates below the bank’s previously declared lower bound may land him with a 100 billion-euro headache as he tries to boost euro zone growth and inflation.
That means that more than 100 billion euros of German bonds, with maturities between three and four years, have now become ineligible for the ECB’s bond-buying stimulus program. Under the ECB’s own rules, bonds with yields lower than the deposit rate cannot be part of the quantitative easing scheme.
Of course, that might be just a temporary problem. Central bankers, for now, still have plenty of other German bonds to buy. If the ECB cuts rates in December, some bonds now trading below -20 bps could again become eligible for QE.
However, if inflation continues to lag forecasts and the Federal Reserve again postpones raising rates, European markets may immediately begin to price in another one, pushing yields again below the new deposit rate. Which brings us back to tomorrow’s FOMC meeting and the anticipation behind it, making the EUR/USD pair moves very unpredictable.
3- Bearish Technical Signals – For Now
Yes, yes. I did notice that the EUR/USD pair FINALLY broke below that damn 1.11 support level, not to mention that it confirmed a break below the Ichimoku cloud and the lower band of an upward ranging channel. The majority of forex traders are also bullish on the pair, signaling the sentiment could shift pretty rapidly (because the majority of the forex traders are wrong with their positions.) These are all bearish signals, alright.
But… Alright, there is no but. The market already completed its pullback towards 23% Fibonacci retracement level and is now heading back down.The only reason I’m holding off a bearish trade is the above two mixed fundamentals, especially FOMC. Any surprises (i.e. appearance of Dr. Gloom and Doom for the US economy) could shift this bearish sentiment right back up.
Notice I’m talking to my Invest Divas, not Trade Divas. In order to enter an investing position, hold off until tomorrow and get a result out of the FOMC statement. When the volatility dies down, decide if the long term perspective for EUR/USD remains bearish. Here are the levels to keep in mind:
Important Note: The support and resistance levels are not suitable for all traders and largely depend on your account size, margin and leverage. Book a private lesson to learn how to personalize your account based on our trading guide.