EUR/USD Rate Outlook Hinges On FOMC Forward-Guidance

 

USD Chart

Fundamental Forecast for USD: Bullish

EURUSD TALKING POINTS

The EUR/USD rebound following the European Central Bank (ECB) meeting appears to have stalled ahead of the Federal Reserve interest rate decision, and the failed attempt to test the monthly-high (1.1409) may bring the downside targets back on the radar as both price and the Relative Strength Index (RSI) continue to track the bearish trends from earlier this year.

The Federal Open Market Committee (FOMC) interest rate decision takes center stage even though the central bank is widely expected to keep the benchmark interest rate on hold as Fed officials are tasked with updating Summary of Economic Projections (SEP).

FOMC Chart

The fresh updates may show a further reduction in the growth and inflation outlook as the FOMC warns ‘that ‘some risks to the downside had increased, including the possibilities of a sharper-than-expected slowdown in global economic growth, particularly in China and Europe,’ and the committee may show a greater willingness to abandon the hiking-cycle ‘in light of global economic and financial developments and muted inflation pressures.’

Moreover, the SEP may no longer reflect a threat for above-target inflation as ‘participants noted that market-based measures of inflation compensation had moved lower in recent months,’ and the central bank may continue to alter the forward-guidance to reflect a more accommodative stance as mixed data prints coming out of the U.S. economy spurfears of a looming recession.

Fed Chart

Moreover, the FOMC may also unveil plans to taper the $50/month in quantitative tightening (QT) as Chairman Jerome Powell asserts that ‘the Committee can now evaluate the appropriate timing and approach for the end of balance sheet runoff,’ and a material adjustment in the monetary policy outlook may produce headwinds for the U.S. dollar amid indications of a policy error.

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