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