Today, all eyes will be on the much-awaited FOMC policy decision. This will be one of the ‘bigger’ meetings, which includes fresh economic forecasts, an updated ‘dot plot’, as well as a press conference by Chair Yellen. The forecast is for the Committee to raise borrowing costs by 25bps, something overwhelmingly supported by market pricing. The implied probability for such action currently rests at 99.6%. Given that a rate hike is fully priced in at this stage, we think market focus will mostly be on any potential changes to the ‘dot plot’. In addition, market participants may look for clues as to when the Fed will begin normalizing its enormous balance sheet.

Economic developments have been quite disappointing recently. Inflation has slowed, inflation expectations have declined notably, wage growth is flat, and expectations regarding fiscal stimulus have diminished. As such, we expect Chair Yellen to maintain a cautious stance with regards to the economic progress. Having said that though, a cautious tone does not necessarily imply that the dollar will weaken in the aftermath. The market is already extremely pessimistic with regards to the pace of future rate increases.

Following this hike, the next one is fully priced in for June 2018, which means investors are anticipating a pause in the Fed’s normalizing cycle. So, in case the ‘dot plot’ is left untouched, signaling one more hike in 2017 and another three in 2018, this could be enough to revive speculation regarding another rate increase this year and perhaps keep investors from unwinding their long USD positions. In such a case, the reaction in USD may be somewhat positive. In order for the dollar to weaken notably, the ‘dots’ would likely need to be revised lower, in our view.

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EUR/USD has been moving in a sideways manner since the ECB meeting, oscillating between the 1.1160 (S1) barrier and the resistance of 1.1240 (R1). Nevertheless, the price structure on the 4-hour chart suggests that an uptrend is in place since the 10th of April. Therefore, even if the Fed leaves the ‘dot plot’ unchanged and the EUR/USD declines, we would treat such a setback as a corrective phase. Given the continued recovery in the Euro area and the removal of the ECB’s interest rate easing bias, we expect the bulls to take the reins again soon and push the battle up for a test near 1.1300 (R2). On the other hand, if the Fed revises its rate path down, we would expect the aforementioned test to come today, without a preceding correction.

USD/JPY also traded quietly yesterday, staying slightly below the crossroad of the 110.30 (R1) resistance line and the downtrend line taken from the peak of the 11th of May. In case the rate path stays untouched, the rate may trade higher and break above that resistance zone. Such a break could initially aim for the next resistance of 110.75 (R2). Now, in case the plot is downgraded, USD/JPY could tumble below the support of 109.70 (S1), overcome the next at 109.35 (S2), and perhaps challenge the 108.90 (S3) territory.

As for the rest of today’s highlights:

During the European day, UK employment data for April are due out. The unemployment rate is expected unchanged, average weekly earnings including bonuses are forecast to have risen at the same pace as previously, while earnings excluding bonuses are anticipated to have slowed slightly. Considering that inflation accelerated notably in April, unchanged or slowing wages would push real wages further into the negative territory, something that could weigh on the pound.

As for the US indicators, we get CPI and retail sales data, all for May. Kicking off with the CPIs, the headline rate is expected to have declined again, albeit marginally, while the core rate is anticipated to have held steady. As for the retail sales, the forecast is for both the headline and the core rates to have ticked down from previously, but to have remained within the positive territory. Even though a slight slowdown in the headline CPI and retail sales could hurt the dollar somewhat on the news, the currency’s forthcoming direction will probably be decided by the FOMC signals later in the day.

Besides Fed Chair Yellen, we have one more speaker on the agenda: ECB Vice President Vitor Constancio.

EUR/USD

Support: 1.1160 (S1), 1.1110 (S2), 1.1075 (S3)

Resistance: 1.1240 (R1), 1.1300 (R2), 1.1370 (R3)

USD/JPY

Support: 109.70 (S1), 109.35 (S2), 108.90 (S3)

Resistance: 110.30 (R1), 110.75 (R2), 111.25 (R3)

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