Bringing you a plausible answer to the question of, where will price move tomorrow?
When I examine critical and volatile events like upcoming FOMC I look for several things to give me clues in order to shape a trade idea. What happened last time? What is anticipated? What is the inevitable outcome?
Last time most members agreed on, balance sheet unwind. It’s well priced in as it was communicated to the markets well in advance(bond negative). Several members mentioned that further hikes are needed but the pace could slow. This sent USD down a death spiral. Factors such as low consumer spending, low wage growth and inflation were in focus. None of these elements have improved, apart from inflation which was a one off effect from increased gas(petrol) prices caused by shortages from hurricane disruptions.
However there are global factors that show inflation is picking up everywhere, and further hikes are needed or else %2 FED target will overshoot. But in the aftermath of the hurricanes destruction the FED will be very cautious and await data, more importantly their main theme in the upcoming meeting will be balance sheet unwind. Hence they would not want to update their stance on further hikes at the time being.
USD has recently appreciated because tax reform talk is back and market is pricing in a promise from FOMC that another hike is definitely on the table. In other words market is pricing in a very hawkish tone. Which takes us to the inevitable truth, that the FED will want to buy time before talking up rate hike for December. Resulting in USD to selloff, before picking the pace again.
Notable on the technical side is EURUSD daily insidebar break to the upside targeting 1.21¬ , GBPUSD & GOLD DAILY bodies are much smaller than the previous day. Previous day were bearish closes and recent is bullish with increased volume pointing at a bullish breakout (see volume analysis)
Risk to the trade idea
USD dip is very likely on the back of a disappointing FED. However should the meeting overlook the recent slow pace in wage growth and consumption, most importantly recent damages from hurricanes and muster a hawkish tone. USD will fly, which is unlikely in my assessment.
Market is pricing in a hawkish tone. However with recent developments it’s an unlikely outcome and USD dip is almost given. USD will pick pace again as tax reform talks are supportive in the near term.
Good Luck To Us All