FOMC Preview: EUR/USD to Eye Monthly-High on Dovish Forward-Guidance

Trading the News: Federal Open Market Committee (FOMC) Interest Rate Decision

The Federal Open Market Committee (FOMC) interest rate decision may shake up the near-term outlook for the U.S. dollar as the central bank is slated to release the updated Summary of Economic Projections (SEP).

Even though the FOMC is widely expected to keep the benchmark interest in its current threshold of 2.25% to 2.50%, Fed officials may continue to alter the forward-guidance for monetary policy as ‘participants noted 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.’

In response, the FOMC may adjust the longer-run interest rate forecast as the previous projections stand at 2.75% to 3.00%, and a downward revision may produce headwinds for the U.S. dollar as the central bank appears to be on track to abandon the hiking-cycle. At the same time, the Federal Reserve may also reveal plans to wind down the $50B/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 change in the Feds forward-guidance may fuel the recent advance in EUR/USD as the central bank prepares to shift gears.

However, signs of a goldilocks economy may encourage Fed officials to stick to the current script, and little to no changes in the SEP may heighten the appeal of the greenback as it spurs speculation for an FOMC rate-hike in 2019.Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups.

Impact that the FOMC interest rate decision had on EUR/USD during the previous meeting

January 2019 Federal Open Market Committee (FOMC) Interest Rate Decision

EUR/USD 10-Minute Chart

The Federal Open Market Committee (FOMC) moved to the sidelines at its first meeting for 2019, with the central bank keeping the benchmark interest rate in its current threshold of 2.25% to 2.50%. However, the FOMC changed its tune as ‘the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes,’ and it seems as though the Fed will continue to alter the forward-guidance over the coming months ‘in light of global economic and financial developments and muted inflation pressures.’

The U.S. dollar struggled to hold its ground following the less-hawkish statement, with EUR/USD bouncing back ahead of the 1.1400 handle to close the day at 1.1479. Review the DailyFX Advanced Guide for Trading the News to learn our 8 step strategy.

EUR/USD Daily Chart

• The broader outlook for EUR/USD remains tilted to the downside as it cleared the 2018-low (1.1216) following the European Central Bank (ECB) meeting, but the exchange rate may stage a run at the monthly-high (1.1409) as it breaks out of a narrow range.

• The close above the 1.1340 (38.2% expansion) pivot opens up the Fibonacci overlap around 1.1390 (61.8% retracement) to 1.1400 (50% expansion), with the next region of interest coming in around 1.1430 (23.6% expansion) to 1.1450 (50% retracement).

• Will keep a close eye on the Relative Strength Index (RSI) as the oscillator appears to be breaking out of the bearish formation from earlier this year.