This morning's Euro bid is likely due to the market's near unanimous expectation for Fed Funds to remain unchanged and in my opinion, unwarranted expectation for a dovish statement. I expect to see Euro flirt with this resistance up to 2pm release of the statement. I agree that rates will stay on hold. However, I believe the FOMC statement is going to be a fair bit more hawkish than the market expects. Recent macro data has unwarrantedly soured sentiment, such that the Fed faces a credibility issue. markets aren't expecting a rate rise until April 2016. I believe the Fed will opt for a more hawkish statement to keep the possibility of a December move still alive - even if they currently don't expect to move in 2015.
Such hawkish hints could come in the form of:
- Any positive mention of China directly, or of "international developments"
- Walking back from market-based expectations/compensation measures
- Reduced labor-slack discussion
- A vote with 1 or fewer dissents
WIth the market offsides on the Euro trade, I expect to see the dollar strengthen once the substance of the statement is absorbed and the Euro to retreat lower. That said, if the Fed chooses to express similar levels of concern about the health of the economy as it did in September, Euro shorts are likely to be burned.
Watch the 1.1080/1.1090 . Subsequent closes above this level are likely to lead to a swift appreciation toward 1.1130. Otherwise, look for support at 1.1033, which held nicely prior to Wednesday's European open. I'm still targeting a retest of Friday's lows around 1.1000.