EUR/USD Technical Set Up Favors Further Upside Ahead Of FOMC

Includes: ERO, EU, EUO, FXE, UDN, UUP
by: FXstreet

The EUR/USD continued to add to its gains, climbing another 26 pips to close at $1.3391. Volatility is likely to increase as we progress throughout the day, with the FOMC Economic Projections due out at 18:00GMT, followed by the Fed Policy Statement and press conference at 18:30GMT.

Kathy Lien of BK Asset Management discussed some possibilities of what market participants can expect as we head into the conclusion of the FOMC Meeting.

The Federal Reserve will be making one of its special quarterly monetary policy announcements on Wednesday and based on the price action of the currency, equity and bond markets, there is very little consensus on what is expected from the central bank.

In concluding her view, Lien went on to add price action for the pair will likely be dictated by how Bernanke will phrase his view of the tapering process. Lien added,

While there are a number of potential scenarios for tomorrow's event, we are focusing on two key possibilities. If Bernanke says tapering does not equal tightening but makes it unambiguously clear that they plan to vary the amount of bonds purchased under their Quantitative Easing program later this year, the dollar should rise. However if Bernanke straddles the fence and spends more time distinguishing the difference between tapering and tightening, the dollar should sell off as this would suggest that the Fed's eagerness to adjust asset purchases has weakened.

Analysts at NAB Global Markets were discussing the FOMC meeting as well, with a key focus what bond yields may face after the announcement, and the influence the move have on the USD. NAB commented,

FX is likely to take its cue from Treasuries. If a 'QE taper' signal takes 10-year yields up through 2.30%, the USD should rally, though beware historically the lags from higher U.S. yields to the dollar have been both long and variable as offshore investors initially seek to avoid capital losses.

In going on to discuss further details about the meeting, NAB commented that due to slightly improving economic data, Bernanke is unlikely to backtrack on his tapering comments from the April FOMC meeting. In conclusion NAB commented,

Bernanke is nevertheless likely to stress that any such move still remain dependent on the incoming economic news, and is unlikely to give an expected date at which the process may commence (unless of course, a decision is made today to start scaling back QE - unlikely in our view, since that would undoubtedly amount to a fresh shock for markets).

Chief FXStreet Analyst Val Bednarik provided some details on the technical developments from the shorter term time frame charts.

The EUR/USD maintains a bullish tone according to the hourly chart, as price recovered from a short-term ascendant trend line to quickly overcome its 20 SMA, while indicators hold in positive territory. The lack of volume at the time being helps indicators turn flat and lack momentum, but there are no signs the upside is not still favored.

In conclusion, Bednarik went on comment technical developments on the 4 hour time frame also remain bullish, with momentum studies favoring a move towards the $1.3520 area.

From a longer term technical perspective, the set up on the EUR/USD daily chart also remains strong ahead of the FOMC. Price continues to remain firmly above both the 9 and 20 DMA's, which should continue to help limit pullbacks. Furthermore, the RSI (14) continues to consolidate above 60, maintain the bullish zone between 40 and 80. On a final note, the ADX (7) trend indicator is now upward sloping and building value above 25 on the weekly chart, indicating trend strength on the long term time frames is continuing to build.

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