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Will FOMC Send EUR/USD Toward 1.10?

By Kathy LienForexJun 18, 2019 03:31PM ET
www.investing.com/analysis/will-fomc-send-eurusd-toward-110-200432642
Will FOMC Send EUR/USD Toward 1.10?
By Kathy Lien   |  Jun 18, 2019 03:31PM ET
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Kathy Lien, Managing Director Of FX Strategy For BK Asset Management

Daily FX Market Roundup June 18, 2019

The June Federal Reserve meeting is the most important event of the month. Central bank rate decisions are always significant but updated economic projections and dot-plot forecasts will also be released. Fed Chairman Powell will hold a press conference where reporters will undoubtedly pressure him for details about his recent comments. Earlier this month, Powell said the economy is growing but given trade developments, they will “act as appropriate to sustain expansion.” While he never used the words “rate cut,” investors rushed to price-in easing. Fed fund futures are calling for a 95% chance of a quarter point cut in September. Back in March, the dot-plot forecast dropped from two to zero rate hikes this year. At the time, 11 out of 17 policymakers felt that additional tightening was not necessary in 2019. This dramatic shift was a result of their concerns for low inflation, household spending and business investment. In May, Fed Chair Powell put on a brave face and dismissed talk of easing by saying policy stance is “appropriate right now” and “we don’t see a strong case for moving in either direction.”

How the U.S. dollar reacts will depend on whether Powell repeats this line or replaces it with language that validates the market’s forecast for a rate cut. In reality, we think that unless stocks fall another 15-20% or job growth turns into job losses, the Fed will keep interest rates unchanged for the rest of the year. There hasn’t been a significant slowdown in the labor market, retail sales increased in May and spending in April was revised from negative to positive. Equities are still attracting buyers, Chinese data has been stable and the strain on the U.S. economy is only beginning to appear. The decline in U.S. yields also helps the economy. For all of these reasons, Powell may not be particularly dovish because even when he suggested that they could take steps to sustain the expansion, he described the economy as growing, said unemployment is low and inflation stable. The Fed has no immediate plans to change interest rates, which should be the main takeaway from this month’s meeting. However we could be wrong and Powell could talk about the possibility of easing because according to the table below, there’s been widespread deterioration in the economy since the last policy meeting. The remaining 6 policymakers that favored a rate hike in 2019 could also flip their views.

When it comes to trading FOMC, the main focus should be the dot plot and Powell’s guidance. If 3 or 4 additional policymakers support no hikes this year OR some members favor a cut, we could see the dollar fall sharply, especially if that forecast is reinforced by cautious comments from the Fed Chair. In this scenario, USD/JPY will drop as low as 107.50 and EUR/USD could break above 1.1350. However if Powell puts on a brave face, emphasizes the areas of strength in the US economy and the dot plot/economic projections remain mostly unchanged, we could see a significant recovery in the greenback that could take USD/JPY above 109 and EUR/USD to 1.10.

In the event of a less dovish Fed, the euro could be hit the hardest because European Central Bank President Draghi said more rate cuts are part of the ECB’s toolkit and “if the outlook doesn’t improve additional stimulus will be needed,” sending EUR/USD sharply lower. The possibility of additional easing is reinforced by weaker data. The expectations component of the Eurozone ZEW survey fell to its lowest level since January while the German component dropped to an 8-month low. Consumer price growth also slowed as the trade surplus narrowed. All of this follows the Bundesbank’s warning of a Q1 contraction in the region’s largest economy. So if the Fed does not suggest that rate cuts are possible, the ECB’s intention to ease could drive EUR/USD to 1.10.

USD Data Points
USD Data Points

Will FOMC Send EUR/USD Toward 1.10?
 
Will FOMC Send EUR/USD Toward 1.10?

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Morad Nibou
Morad Nibou Jun 19, 2019 10:41AM ET
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i don't understand why persons here speak for 1.10 level .. kathy does not said that, she said if if  the Fed does not suggest that rate cuts are possible. and i think all we must wait until decision of fed. for i think fed will cut rate because the inflation rate is under 2%
Nhan Huynh
Nhan Huynh Jun 19, 2019 8:36AM ET
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Great!
Chris Trader
Chris Trader Jun 19, 2019 3:33AM ET
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1.10 Agreed
Jude Especkerman
Jude Especkerman Jun 19, 2019 3:15AM ET
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Thanks Kathy
Decent Kamrul
Decent Kamrul Jun 19, 2019 1:06AM ET
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Great analysis
Partap Singh
Partap Singh Jun 19, 2019 12:04AM ET
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we always wait for your analysis
Partap Singh
Partap Singh Jun 19, 2019 12:04AM ET
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good analysis thank you Kathy
Naveen Dahiya
Naveen Dahiya Jun 18, 2019 9:28PM ET
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what about xau/USD ????
Agiel Duhaney
Gilles94 Jun 18, 2019 7:46PM ET
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The stock  market  as  well  as  bond  rates    and  the  ongoing  trade   war   with  China  will  certainly  have  some  bearing  on  the  EUK/USD  1.10  level. Thanks  Kathy
Fauzi Ghozali
Fauzi Ghozali Jun 18, 2019 7:13PM ET
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I Will remember this. Thanks
Thandekile Zwane
Thandekile Zwane Jun 18, 2019 7:12PM ET
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Great review Kathy - as we wait in anticipation
Zack Wei Zhe
Zack Wei Zhe Jun 18, 2019 6:49PM ET
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Thanks Kathy!
Charanjeet Sandhu
Charanjeet Sandhu Jun 18, 2019 6:30PM ET
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Excellent A to Z philosophical findings.
Best Got Talents wild
Best Got Talents wild Jun 18, 2019 5:50PM ET
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thanks alot
Jerzy Leptuch
Jerzy Leptuch Jun 18, 2019 5:48PM ET
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wondering how CAD will react to fed minutes
Chris Poulos
Chris Poulos Jun 18, 2019 5:48PM ET
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if the fed minutes are benign (and it looks like they will be) usd/cad should shoot back above 1.34
Irpan Supiandi
Irpan Supiandi Jun 18, 2019 5:44PM ET
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thanx kathy.your article clearly understand.hope you don't mind i use the table for my review on mrket today
Jie zhang
Jie zhang Jun 18, 2019 5:33PM ET
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Thanks a lot!
LEHLOGONOLO MOSESE
LEHLOGONOLO MOSESE Jun 18, 2019 5:07PM ET
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With all those tensions on the World/Market the is no way that it won't move!!
Green Mashauri
Green Mashauri Jun 18, 2019 4:09PM ET
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CAD?
Chris Poulos
Chris Poulos Jun 18, 2019 4:09PM ET
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usd/cad likely going back to 1.34
 
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