Could EUR/USD finally break 1.05 on this FOMC day?

15 December, 2016

The market is demanding a rate rise and the Fed better deliver it today, for if it doesn’t the bank’s credibly will be severely damaged. There is really no excuse not to do so. Economic data has been improving, financial markets are calm, and Trump’s planned fiscal spending will likely put upward pressure on inflation – not to mention the impact of rising crude oil prices. The dollar could absolutely tank if the Fed does the unexpected and holds fire. But the dollar may drop anyway if the expected rate rise is accompanied by a more dovish-than-expected policy statement and/or projections. I however think this will not be the case. I think the Fed will deliver an upbeat outlook on the economy and the dollar will surge, especially against weaker currencies like the euro.

For the EUR/USD, a hawkish Fed hike could mean the breakdown of the 1.05 handle at the umpteenth time of asking. The ECB has already decided to extend its QE programme and has therefore turned even more dovish. Thus, the growing divergence of monetary policy stances between the US and Eurozone should keep the pressure on the EUR/USD exchange rate.

Now you have seen this weekly chart of the EUR/USD before. If you haven’t, HERE is the link for our December 2 article in which we pointed out two scenarios. We argued that before the ECB and Fed policy meetings that there was a good possibility the EUR/USD would break above 1.0660 and rally into the 1.0850/80 resistance area, before turning lower. Well it did just that on the ECB day and dropped sharply off of this broken old support area, as one would have expected. The unit then paused again at the top of the key 1.0460/1.0525 support range ahead of the FOMC, and is where it was again at the time of this writing.

So far, the EUR/USD has stuck to the script. But it will need to break this 1.0460/1.0525 support area this week, preferably today, if we are to see a run towards parity soon. If it fails to crack the sturdy support despite the ECB extending QE and Fed potentially hiking rates today, then one would have to conclude that the EUR/USD may have put in a bottom for the time being. But our base case scenario is that we will see a breakdown. If so, the first bearish objective on the weekly time frame will be the Fibonacci convergence area between 1.0175 and 1.0225. Below here, the next objective would be parity. This bearish view will become weak if price holds above 1.0690 on a weekly closing basis and become invalid if 1.0850/80 resistance breaks.


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