We welcome you to the last volatile trading week before market participants leave for Christmas vacation. Traders have been waiting so long for the Federal Reserve to raise interest rates for a second time, following the December 2015 rate hike, which was the first in more than nine years. This week, the wait should be brought to an end. The Fed is widely expected to announce an interest rate hike on Wednesday, but it is not the rate hike that matters to markets since it is completely priced in.
Instead, investors are focusing on the impacts that future policy changes may have and with the incoming Trump administration being the new game changer, it is too early to assess the impact of that new administration. The Fed could therefore endorse a wait-and-see approach for monetary policy, making Wednesday's FOMC decision a nonevent for traders.
Investors will be listening for Fed Chair Janet Yellen's thoughts on how the Trump administration could impact the economy and thus the future rate hike path but as the details of a fiscal stimulus package are still unknown policymakers could adopt a cautious approach. If the Fed meets the market's expectations for (only) two rate hikes next year, investors may tend to take profits on dollar long position before year-end, which is why the dollar rally may fizzle out.
Apart from the highly anticipated Fed meeting, the Bank of England is expected to carry its current policy into the next year when BoE policymakers decide on monetary policy on Thursday. The BoE may adopt a more hawkish tone as inflation is projected to uptick in November. U.K. Consumer Prices are scheduled for release on Tuesday. U.S. CPI data due on Thursday could receive less attention after the Fed's rate decision.
Now let's shift the focus to the technical outlook while we wonder if there could be a major pullback in the U.S. dollar.
EUR/USD
The euro faces its crucial support area between 1.05 and 1.0460. If the euro falls below 1.0460, it could experience a sell-off towards 1.0220 before year-end. If, however, the pair is able to hold above the 1.05/1.0470-mark chances are that the euro rises towards 1.08, 1.0850 and 1.0950 on profit-taking. However, everything now depends on the Fed and its projections for 2017.
GBP/USD
Like the euro, the cable faces a crucial barrier at around 1.2530-10. If the pound drops below 1.2480 it may slide towards 1.2450 and 1.24. Below 1.2380 we see a next important support at 1.2350. Nonetheless, we currently see a higher likelihood of an upward move given the benign U.K. inflation expectations and possible profit taking in dollar positions.
Ahead of the FOMC decision we expect the bias to be slightly in favor of the greenback but this could change quickly on Wednesday.
Here are our daily signal alerts:
EUR/USD
Long at 1.0585 SL 25 TP 20, 40
Short at 1.0525 SL 25 TP 20, 40
GBP/USD
Long at 1.2635 SL 25 TP 20, 50
Short at 1.2569 SL 25 TP 20, 40
We wish you good trades and many pips!
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