09/18 WEDNESDAY | 18:00 GMT | USD FEDERAL RESERVE RATE DECISION AND PRESS CONFERENCE

The truce in the US-China trade war has provoked a sharp repricing of Fed rate cut expectations ahead of the September Fed meeting. Even though Fed Chair Jerome Powell has said in recent months that the Fed would “act as appropriate” if needed, the dramatic rise in US Treasury yields suggests that there is a strong feeling among market participants that the Fed will not be as aggressively dovish when it meets this coming Wednesday.

FEDERAL RESERVE INTEREST RATE EXPECTATIONS (SEPTEMBER 13, 2019) (TABLE 1)

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Now, Fed funds futures continue to price in a 100% chance of a 25-bps rate cut at the September Fed meeting. Odds of a 50-bps rate cut have rebounded since Thursday, September 12 (a 25-bps rate hike is no longer more likely than a 50-bps rate cut). Meanwhile, odds of another 25-bps rate cut by December have dropped to 68% - down from 76% on Thursday, September 12.

Pairs to Watch: EURUSD, USDJPY, Gold, DXY Index

EURUSD TECHNICAL ANALYSIS: DAILY RATE CHART (MAY 2018 TO SEPTEMBER 2019) (CHART 1)

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In our EURUSD technical forecast update in the first week in September, it was noted that “the area where EURUSD rates found support is familiar: channel support dating back to the August and November 2018 lows. Similarly, the descending trendline from the January and April 2019 swing highs is proving as support as well…If the EURUSD reversal is going to gather pace, traders may want to see rates breach the August 23 bullish outside engulfing low at 1.1052.”

A lack of significant movement after the September ECB meeting keeps the EURUSD forecast intact from Thursday, September 12: “While EURUSD has been unable to clear out 1.1052 thus far, the support region from last week that produced the yearly low at 1.0926 has held up so far; the low around the September ECB meeting was 1.0927. As a result, we’re now seeing a range form for EURUSD between 1.0926 and 1.1052. The measured target on a bullish reversal attempt higher would be 1.1178.”

IG CLIENT SENTIMENT INDEX: EURUSD RATE FORECAST (SEPTEMBER 13, 2019) (CHART 2)

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EURUSD: Retail trader data shows 57.1% of traders are net-long with the ratio of traders long to short at 1.33 to 1. In fact, traders have remained net-long since July 1 when EURUSD traded near 1.1369; price has moved 2.6% lower since then. The number of traders net-long is 9.6% lower than yesterday and 16.9% lower from last week, while the number of traders net-short is 22.3% higher than yesterday and 1.0% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests EURUSD prices may continue to fall. Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current EURUSD price trend may soon reverse higher despite the fact traders remain net-long.