EUR/USD May Look Past Draghi Comments With FOMC In The Spotlight

EUR/USD fell after ECB President Mario Draghi said future rate cuts may be in the cards if the outlook does not improve and even alluded to re-introducing QE if necessary. The symposium in Sintra, Portugal ends today and will include more commentary from the central bank President. However, the market impact of these comments may be overshadowed by the highly-anticipated FOMC rate decision.

While overnight index swaps are pricing in a meager 19 percent chance of a Fed rate cut, bets for a cuts by the July meeting jumped to a staggering 82 percent. If the Fed’s rhetoric falls in line with its previously-articulated neutrality, the less-than-dovish surprise may catch markets off-guard and send the US Dollar higher at the expense of equities and USD-crosses.

A similar reaction occurred at the April 30-June 1 meeting where market participants found themselves dealing with a surprisingly less-dovish Fed. The fall in equities was a telling story. If investors see that prevailing economic conditions are not supportive of strong economic growth, cheap credit is the next best option to boost equities. If that possibility is undermined, why stay exposed to a vulnerable index in a slowing economy?

Conversely, if the Fed strikes dovish undertones, it could send the S&P 500 index higher and potentially relieve some of the risks associated with a stronger US DollarHowever, if Chairman Jerome Powell reveals an unexpectedly pessimistic outlook for growth, it may induce risk aversion and push the Dollar higher as a premium is put on liquidity over yields.

CHART OF THE DAY: EUR/USD MAY TOUCH CRITICAL SUPPORT IF FED NEUTRALITY IS MAINTAINED

Chart Showing EURUSD

 

 
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