Will a Hawkish FOMC Push EUR/USD Down to 1.3300?

[B]FOMC Rate Decision[/B] (18:15 GMT; 14:15 EST) [B]GDP Annualized[/B] (1Q F) (12:30 GMT; 08:30 EST)
Expected: 5.25% Expected: 0.8%
Previous: 5.25% Previous: 0.6%

[B]How Will The Markets React?[/B]
US asset markets have been at a standstill throughout the week as traders anxiously await Thursday?s major event risk. The Federal Reserve meeting will be by far the most important news we?ve seen out of the US in a while, however, it?s not the actual rate decision that will be the big draw. Instead, the FOMC policy statement that will be released at the same time as the rate announcement will be most pertinent to price action for Treasuries, the greenback, and US equities. The major notations to watch will be in regards to inflation, economic growth, and the housing sector. First, the Fed noted that core inflation remained “somewhat elevated” during their last meeting. Since then, core inflation growth has eased back, but headline price pressures have started to mount again, making the central bank more likely to maintain their staunchly hawkish bias. Meanwhile, first quarter GDP is anticipated to be revised slightly higher to 0.8 percent from 0.6 percent, but that still represents the slowest pace since the fourth quarter of 2002. Nevertheless, the Fed?s outlook on growth for the second and third quarters will be more pertinent. In May, the Fed forecasted that the economy would expand at a “moderate pace” over coming quarters, but with news out of the housing sector getting worse and worse, there is a major risk that the central bank will note that the woes of homebuilders and falling property prices will create a longer-than-expected drag on US growth. Overall, the FOMC statement will probably continue to note persistent inflation and soft growth, but with interest rates remaining the primary concern of the markets, a shift to a more dovish or hawkish bias will be the event to spark the most volatility.
For more on the Federal Reserve meeting, check out Kathy Lien?s special report.
[B]Bonds - 10-Year Treasury Note Futures[/B]
For the third consecutive day, 10-year Treasury Note futures have held below Fibonacci resistance at 105-15 despite market-moving economic data. Wednesday?s release of disappointing durable goods orders did lead Treasuries to spike higher, but bond traders are apprehensive to take decisive bets ahead of the FOMC policy statement. Another month of hawkish statements by the Fed could turn Treasuries lower in anticipation of potential rate hikes later in the year. However, if the central bank signals that they are no longer concerned about inflation pressures, prices could spike through resistance as yields plummet.

On a longer-term scale, the EUR/USD uptrend remains intact with a supporting trendline formed from the February 2006 lows still holding. However, a cluster of Fibonacci support at 1.3475 -1.3500 may limit any additional gains for the pair, but with major event risk on the horizon, near-term support and resistance may prove to be frail. While the revision to first quarter GDP will surely add volatility to EUR/USD, price directionality will be contingent upon the FOMC rate decision/policy statement. The Fed is widely expected to leave rates steady at 5.25 percent, but the key to trading the event will be on any changes to the policy statement. Even if the central bank cites that economic growth remains tepid, any signs that inflation remains a concern to the Fed will be perceived as a hawkish bias, and thus, the US dollar could see strong enough of a rally to take EUR/USD down to test 1.3300. On the other hand, if the Fed notes that inflation has subsided or even gives the slightest impression that price pressures are less of a concern, EUR/USD would break higher to test resistance at 1.3522 as traders would consider the possibility of a rate cut later in the year.

[B]Equities - S&P 500 Index[/B]
The US stock market posted its first advance in four days after a rally in oil prices improved earnings prospects for fuel producers, as the S&P 500 ended Wednesday up 0.9 percent at 1506.34. Crude oil for August delivery rose 1.8 percent to $68.97/bbl in New York after an Energy Department report showed an unexpected decline in gasoline inventories last week, leading Exxon to surge $1.66 to $83.48 while pushing Chevron Corp., the second-biggest US oil producer, to climb $1.19 to $83.89. Meanwhile, shares of Oracle Corp. rose 53 cents to $19.69 after the software maker said sales may rise as much as 21 percent in the quarter ending August 31.
The S&P 500 could make a more decisive move on Thursday with the FOMC rate decision/policy statement scheduled to be released. While the central bank is widely anticipated to leave rates at 5.25 percent, any phrase change in the policy statement that implies a consistently hawkish bias could send the S&P 500 tumbling through support at 1,490, as it would increase the risk that rates will stay on hold or could actually be hiked later in the year. On the other hand, upward revision to first quarter GDP along with a softer inflation stance would send the US benchmark equity index surging up to the recent multi-year highs near 1,540, as the combination of improving economic growth along with more accommodative monetary policy will leave S&P bulls believing that the glory days aren?t over yet.