Though markets are not at all expecting the US Federal Reserve to make any substantive changes to monetary policy this afternoon when the FOMC meeting concludes, the general expectation is that the Fed will lean towards a more hawkish stance, potentially reinforcing the high likelihood of a December interest rate hike as well as further rate hikes and balance sheet reduction through next year. These expectations, coupled with the anticipation of a new Fed Chair to be appointed by President Trump possibly on Thursday, have helped to prop up the US dollar just as the euro has continued to be pressured due in part to a dovish European Central Bank last week.
Ahead of the Fed decision and statement on Wednesday afternoon, the US dollar has remained well-supported while the euro has generally remained weighed down. This has now placed the EUR/USD currency pair at a precarious juncture just above the 1.1600 handle. Previously, EUR/USD had already broken down below a large head-and-shoulders bearish pattern last week in the aftermath of the ECB decision. The pair has since settled just above the noted 1.1600 support area, now forming what could turn out to be a bearish inverted flag pattern in the process.
If the Fed indeed sounds a more hawkish tone on Wednesday, the statement could prompt a continued dollar surge that triggers a further breakdown for EUR/USD. Other key upcoming events, including Trump’s impending Fed Chair appointment as well as the highly anticipated US tax reform bill, could also trigger a substantial dollar move. With such a move, a significant dollar-driven EUR/USD breakdown below 1.1600 support could open the way towards the next major support level to the downside around the 1.1450 price area.
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