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  • After failing above the key Fibo, (Failed to register a daily close above key 1.1780/38.2 per cent retrace of the 1.2556 to 1.1301 2018 fall), downside risks are growing.  
  • However, the pair had been pretty much sidelined ahead of the FOMC and was quiet in Asia, (trading within range of 1.1756/68 and European markets and only started to lose its footing as the Europeans got going  – sliding to 1.1725.

In the US session, so far, the pair has managed to recover back to 1.1753 after opening  -0.08%, (DXY +0.06%). More range trading is now likely ahead of FOMC later today and markets are gearing up for some heavy volatility around the event even though the Fed is fully priced in with respect to a 25bp rate hike (including most likely a matching hike in the IOER rate).  However, markets will be looking to see if the Fed will possibly end its ‘accommodative’ policy era and traders will be scrutinising the statement for such removal of language – thus, the market split on whether it will be a ‘dovish’ or ‘hawkish’ hike. As per usual, the Fed’s statement, dot plots/median forecasts and Powell will be the catalysts which could all send mixed messages – so get ready for a rocky ride.  

Meanwhile, in other recent events determining the current price in EUR/USD, the Dollar got a boost from The Conference Board’s Consumer Confidence surprised with 138.4 points in September, the highest in 18 years. August’s figure was revised to the upside. “The ECB’s Peter Praet cooled down expectations by saying that Draghi’s comments on Monday were “nothing new.” Draghi said that inflation is on the rise,” noted Yohay Elam FXStreet in today’s Market themes of the Day – adding, “An ally of German Chancellor Angela Merkel lost a vote for a senior party job. Merkel’s coalition is on shaky ground,”  

Bank’s FOMC outlook quotes:

  • “This move has been well-telegraphed in August already and the recent performance of the US economy has only supported the Fed’s assessment of “solid” growth of the economy.”
  • “Its all about the dots – some are on the fence with respect to a fourth hike this year and are sticking to a forecast of 3 hikes this year, but if the Fed remains sanguine about the escalating trade wars a fourth hike becomes more likely.”
  • “However, market participants will scrutinize the statement and Mr. Powell’s explanation in the press conference for signs that the Fed is (finally?) becoming more concerned about protectionism, about recent emerging market stress or about inverting the yield curve, which so far hasn’t stopped them from slowing down the hiking pace” – Analysts at Rabobank  
  • “The takeaway from the Fed will boil down to a few key signals. First, the signal on the neutral is critical since it signals a possible endgame over the next few years. We think the median longer-term dots drop to 2.75%. Second is whether the Fed still feels the policy stance is accommodative – Any modification to that language would be a dovish surprise.”
  • “We are not downplaying that there will be some hawkish elements to the meeting. Indeed, the 2018 dots could show more support for a fourth hike but the market is already pricing in two more hikes next year after today’s meeting.”
  • “The dots already imply an overshoot of the terminal rate above 3% and we simply think the bar is high for a hawkish surprise. That means there is plenty of room to fade any knee-jerk reaction, but on balance, we think the USD ends the day lower” – Mark McCormick, North American Head of FX Strategy at TD Securities.

Key events looking ahead:

When the FOMC dust settled, with respect to the next catalyst for the euro, eyes will quickly switch over to the Italian government that will have to present the new economic growth and fiscal targets for the upcoming years. Analysts at Rabobank explained that, in the end, we expect the 2019 deficit target presented tomorrow will be around 2%, but argued that based on too optimistic gains from certain spending cuts and revenue-raising measures:  

“Yet in any case, the target presented will expectedly fall within the 3% deficit limits in the European budget rules, but will likely fail to comply with the debt reduction and structural budget balance rules. It will be up to the European Commission to decide whether the figure presented in the 2019 budget, later on, is realistic and compatible with the budget rules. Be prepared for some tough negotiations in the coming months, defiant and anti-euro rhetoric by both government parties and a compromise with Brussels, including substantial flexibility regarding the budget rules,” – Rabobank

Other important considerations:

The Euro and dollar are a proxy to the state of EM-FX and China. The dollar catches a safe-haven bid on risk-off on a number of inputs such as off-shore dollar liquidity shortfalls and risks to emerging markets with respect to higher dollar rates and debt ratios denominated in dollars. Argentina is a reminded, (resignation of CB governor), that the EM risks are simmering away on the back burner – that is dollar positive. Also, the trade wars are ongoing between the US/China and the heat on those back burners has just been turned up a few notches on Trump’s accusation that China is meddling with the US elections which are bound to come to the fore in the FX space once the Fed is out of the way. USD/CNH was now through highs of 6.8880 (currently down at 6.8780), but well on its way of a test of the critical 6.89 handle – again, dollar positive and what goes down in China, (with dismal economic growth forecasts) weighs on EM-FX and that is euro negative.  

“It is our view that weakened growth in China will not only be a drag on the value of the CNY vs. the USD in the months ahead but that it will remain a constraint on risk appetite for some time. This is likely to be to the detriment to EM assets. In contrast, strong growth and higher yields in the US are likely to continue supporting broad-based USD,” analysts at Rabobank argued.  

All in all, what happens today as a result of the FOMC maybe a temporary play as bulls target the 1.22 handle in EUR/USD on anything uber-dovish but should take heed of the underbelly in geopolitics and economic fundamentals that may well ultimately serve the dollar bulls in the longer run, at least while the US continues to grow at faster pace than emerging, and other developed economies.  

EUR/USD levels

Today could well be a game changer for the euro bulls that have so far failed to register a daily close above the key 1.1780 Fibonacci level, 38.2 per cent retrace of the 1.2556 to 1.1301 2018 fall, for four trading sessions in a row. A break there today could spur a rally higher targetting 1.1793 as the Daily High Sep 25 initially ahead of 1.1853 as the Daily High June 14th with a longer-term target of the 1.22 handle. If the Fed outcome is hawkish and sanguine about EM’s and China trade war risks, expect a sell-off below recent supports around 1.1720 that will target the 1.1670 Daily Kijun-Sen and a break down below 1.1630 to the 1.15 handle – “The cross will need to drop sub 1.1508 to alleviate immediate upside pressure,” analysts at Commerzbank argued.