Fed’s Neutral/dovish hike could see EUR/USD complete Inv. Head and shoulder pattern

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Fed’s Neutral/dovish hike could see EUR/USD complete Inv. Head and shoulder pattern
The 25 basis point rate hike has been priced-in by the markets. That is evident from the fact that the 10-year yield closed at the highest level in two years a couple of days back.

Meanwhile, the 2-year yield is at the highest level since 2008/09.

Hence, the focus is on what the Fed/Yellen says regarding the pace of policy tightening.

Scenarios

  1. Hawkish scenario = Fed talks about three more rate hikes in 2017 (total 4 including today’s)
  2. Super hawkish = 1 + talk of reducing the balance sheet size
  3. Dovish scenario = Fed hikes rates by 25 bps, keeps the dot plot for 2017 unchanged (i.e. Two more rate hikes)
  4. Super dovish = Fed keeps rates unchanged or hikes rates by 25 bps + downward revision of 2017 rate hike forecasts

It is quite clear scenario 1 & 2 are pro-dollar, while the greenback stands to lose in scenario 3 and lose big time in scenario 4.

EUR/USD Analysis

Given that the European bond markets have remained remarkably calm in the face of Dutch elections, it is safer to assume that the EUR/USD could rally target the inverse head and shoulder neckline on the daily chart below seen around 1.08 levels.

Daily chart

eurusd

Source: www.netdania.com

  • The 50-day moving average line (mid Bollinger line) has bottomed out. This, coupled with a nice rounding bottom formation on the RSI suggests the pair is more likely than not to head higher from here.
  • A daily close today above the 50-day moving average would be a green signal for the bulls to take the pair higher to the inverse head and shoulder neckline level of 1.08.
  • On the other hand, bears would want to see a daily close below 1.05 before attacking the market with fresh offers. Such a move appears likely in scenario 2 and/or political uncertainty raises its ugly head in Europe.
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USD/JPY Chart Analysis: Repeat Telecast of 2H 2016

USD/JPY jumped to a high of 114.59 on Thursday as March Fed rate hike probability neared certainty following hawkish comments from the Fed officials.

It is no surprise to us as we believe Fed is a silent cheerleader of Trump’s policies.

If we take a look at the daily chart, the action over the last two months looks like a mini version of the setup seen during May 2016- Nov 2016 period.

Daily chart

usdjpy d.jpg

Source: Netstatio – http://www.netdania.com

  • The breach of the descending trend line and a rounding bottom formation is almost similar to the breach of the descending trend line and a rounding bottom period seen in 2016.
  • A daily close above 115.00 would mark a bullish break from the rounding bottom… similar to the one seen on November 9.
  • That would open doors for a rally to 118.66 (Dec high) – 120.00 levels.
  • Only a daily close below 111.58 (Feb 7 low) would signal bullish invalidation.