EUR/USD is consolidating below the 1.14 zone as traders hedge into today's FOMC decision, which the Fed is widely expected to end with rates unchanged. The number of policymakers dissenting in favour of a hike is the main variable, while the ECB stays data-dependent ahead of Friday's Eurozone flash CPI.
EUR/USD is trading below the key 1.14 zone, and today's FOMC decision will set its near-term direction. The Fed is expected to keep interest rates unchanged at 3.50%–3.75%, leaving the number of dissenters favouring a hike as the main focus.
Dissenters, not the rate, are the variable
Consensus expects up to two dissenters to vote in favour of a rate hike at this meeting, likely Fed's Logan and/or Fed's Hammack, and there is no Summary of Economic Projections to parse. Forward guidance is likely to remain limited, with Fed Chair Warsh expected to refrain from providing any major policy signals while stressing data dependence and the Fed's commitment to price stability.
The hawkish surprises are more than two dissenters voting for a hike, or an outright hike, while the dovish surprise would be a perfect consensus with no dissenters. A hawkish surprise could send the dollar rallying into new monthly highs on the hawkish repricing; a dovish one would likely see hedges getting unwound and weigh on the greenback in the short term.
Hedging into the decision has already kept the dollar mostly rangebound over the past couple of days, alongside renewed escalation on the US-Iran front. Iran launched a surprise attack against US forces in the region, and although all the missiles and drones were intercepted, the escalation increased the risk of a prolonged conflict and therefore higher energy prices.
The ECB waits for Friday's CPI
On the euro side, the ECB left interest rates unchanged at the last meeting but communicated via the usual post-meeting media leaks that it is ready to hike at the September meeting if the inflation outlook were to deteriorate. Yet the majority of policymakers who spoke after that decision stressed data-dependence and refrained from pre-committing to a September move, highlighting the lack of clear evidence of second-round effects and stable inflation expectations.
Markets are pricing a 65% chance of a rate hike at the September meeting, with a total of 37 bps of tightening expected by year-end. Friday's Flash Eurozone CPI report will influence those interest rate expectations.
EUR/USD sits under a trendline it has not broken
The daily chart puts the pair below strong technical resistance, where the major downward trendline adds confluence. Sellers can keep stepping in there with defined risk above the trendline to target the 1.10 handle, while buyers need a break above the trendline to open the door for a rally into the 1.16 handle.
On the one-hour chart, a hawkish surprise would trigger a selloff into new monthly lows, while a dovish surprise would lead to an upside breakout and take the pair to the 1.1482 level. Tomorrow brings the Eurozone Flash Q2 GDP, the US PCE price index, the US Advance Q2 GDP and the US Jobless Claims figures, before Friday's Eurozone Flash CPI and the US Q2 Employment Cost Index.
Source: Investinglive
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