Federal Reserve's Policy Statement Likely To Determine US Dollar's Next Move

[DailyFx]

Heightened uncertainty surrounding the US Federal Open Market Committee’s interest rate decision at 14:15 EDT virtually guarantees volatility across almost all asset classes - making it the most important event to watch in the week ahead. Economists overwhelmingly expect the Federal Reserve to leave rates steady at 2.00 percent for the first time since August 2007, putting an end to the FOMC’s aggressive rate-cutting cycle.




What Are The Markets Facing?

What else could move the markets this week? Find out the Top 5 Events you should be watching.
Bonds – 10-Year Treasury Note Futures
Treasuries remain very heavy as the markets price in the potential for a rate hike by the Federal Reserve, but the contract has recently bounced from support at 112 on the back of weak US housing market and consumer confidence data. However, the FOMC rate decision presents substantial event risk for Treasuries. While the Fed is not expected to change rates, there is potential for the policy statement to focus heavily on inflation, which could lead the markets to be more aggressive in pricing in a September rate hike and push Treasuries back down toward the December low of 111-16.


FX – EUR/USD
EUR/USD continues to trade within a wide range of 1.5350 – 1.5800, as the US dollar consolidates ahead of the Federal Reserve’s rate decision on Wednesday. Looking ahead to Tuesday, the FOMC is widely expected to leave rates steady at 2.00 percent. However, if the FOMC’s policy statement indicates a pronounced focus on inflation rather than credit conditions, the financial markets, or the economy, the US dollar could actually rally as traders rush to price the potential for rate hike in September. In this case, EUR/USD could fall toward the recent lows at 1.5465 and the 100 SMA at 1.5440. On the other hand, if the FOMC changes course and brushes off inflation, the pair could spike above resistance at 1.5550/70 toward 1.5650.
Where will the euro go next? Discuss the topic with other traders in the EUR/USD Forum.


Equities – Dow Jones Industrial Average
The Dow Jones Industrial Average tumbled to test the March lows at 11,731 on Tuesday, as the trend in the index is clearly bearish. Risks for the DJIA remain to the downside, especially since any indications of distress in the financial sector has the ability to trigger sharp sell-offs in the equity markets. Furthermore, upcoming US news could lead the DJIA down for a test of this zone as the FOMC is likely to leave rates steady on Wednesday, but issue hawkish commentary in their concurrent policy statement. As a result, the DJIA may test 11,731 once again, while sharp declines may lead the index to test the January lows at 11,634.
On the other hand, if the FOMC policy statement doesn’t give the markets much to work with, the DJIA may simply stabilize near Tuesday’s closing levels.


Written by Terri Belkas, Currency Analyst for DailyFX.com


Questions? Comments? E-mail tbelkas@dailyfx.com