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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