In just over an hour we’ll get the latest statement from the FOMC. Given the recent data, I’d expect very little change in emphasis. The economy continues to slowly improve but unemployment remains stubbornly high. That combination will allow the Fed to stay the course and complete its $600 bln in asset purchases.
How will the market react to the status quo?
Perhaps it will take a shot at the barriers at 1.3725 and 1.3750, but I would expect profit-taking and the 61.8% Fibo retracement of the 1.4280/1.2860 decline (1.2735) to keep a lid on the pair at the close.
Should the new, slightly more hawkish make up of the FOMC include a heightened awareness of commodity price inflation, the market would likely go into shock. There is only a tiny chance of that happening, but the buck would likely strengthen on the assumption that the new FOMC is more hawkish than the old FOMC…
To sum up: absent any inflation recognition from the Fed, look for a pop to try and pick the low-hanging fruit between 1.3725 and 1.3750 in EUR/USD. Any inflation fears expressed in the statement would likely spark a sharp short-covering dollar rally.
Here is last month’s statement, for preparation’s sake.
