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Federal Reserve: Hawkish Or Dovish Rate Hike?

Published 12/14/2016, 06:21 AM
Updated 05/14/2017, 06:45 AM

The market environment was subdued as investors remained risk-averse before the Federal Reserve's expected interest rate hike later today. Thus, today could be a big day for currency traders and everyone hopes to profit from volatile fluctuations. However, keep in mind that a Fed rate hike is already priced in and that the major focus will be on the future outlook for monetary policy heading into 2017.

Moreover, the Fed will present an updated assessment with projections on inflation, growth, unemployment and the all-important dot plot forecast. If the dot plot signals only two or fewer hikes next year, the dollar may depreciate as investors liquidate long positions in the U.S. dollar. If, however, the Fed delivers a hawkish hike in terms of its future outlook, the dollar will soar and we could see a continuation of the dollar rally ahead of year-end.

While we expect the price action to be somewhat muted at the time of the actual 25 basis-point rate hike, we could see volatile swings in reaction to Fed Chair Janet Yellen's subsequent press conference beginning at 19:30 UTC.

Before the FOMC decision at 19:00 UTC, we have U.S. Advance Retail Sales scheduled for release at 13:30 UTC and the U.K. Labor Market report due at 9:30 UTC but these reports are likely to take a backseat to the FOMC outlook.

We cannot predict the market's reaction but we can focus on the technical picture in order to validate profitable trading opportunities:

EUR/USD
The euro traded little changed between 1.0670 and 1.06 on Tuesday. Given the recent sideways trading, we will focus on a break either above 1.07 or below 1.05. Above 1.0710, we may see the euro rising towards 1.08 and 1.0950. Below 1.0460 however, the bias shifts again in favor of the bears with a next lower target being at 1.0310.
EUR/USD 4 Hour Chart

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GBP/USD
The cable recently formatted a sideways trading range within its current upward trend channel. We will wait for price breakouts above or below this range while we bear in mind that a significant downside break below 1.2550 also signifies a break of the recent upward channel. Sterling bears should however rather wait for prices below 1.25 in order to sell sterling towards 1.23. In case of a Fed disappointment or a 'dovish rate hike', the pound could climb towards 1.2880 but let's be surprised.
GBP/USD 4 Hour Chart

Here are our daily signal alerts:

EUR/USD
Long at 1.0660 SL 25 TP 17, 40
Short at 1.0620 SL 25 TP 15, 35
GBP/USD
Long at 1.2685 SL 25 TP 15, 40
Short at 1.2640 SL 25 TP 15, 40

We wish you good trades and many pips!


Disclaimer: Any and all liability of the author is excluded.

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