EUR/USD Triangle Outcome Contingent on FOMC’s Next Steps

Talking Points:

- EURUSD holding above 2008-2011 downtrend, now in ST triangle.

- USDJPY stuck in sideways range despite rally in global equities – US Dollar neutral here.

- US Dollar has struggled in wake of prior tapers.

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The Federal Reserve’s March policy meeting today should help relieve frustrated FX traders from the recent swoon in volatility. Another $10B cut to QE3 is widely expected, given the downward pressure on the unemployment rate (now 6.7%) and the steady pace of jobs growth (12-month average now +179.8K). As a result, this FOMC meeting as a bit of a wrinkle that could spur significant price action, depending upon the outcome.

The main issue facing the FOMC right now is what to do about forward guidance as the unemployment rate hits the 6.5% circuit breaker, at which point the Fed had first indicated it could begin to raise short-term interest rates. But commentary in recent weeks has suggested a more concerted shift towards qualitative guidance, in which the FOMC promises to keep interest rates low beyond the 6.5% unemployment rate threshold.

With a $10B taper as the baseline scenario – and therefore a neutral outcome – market participants will be eying the changes to forward guidance and the unemployment rate circuit breaker for bias. A dovish outcome would see the FOMC remove the 6.5% circuit breaker and promise to keep rates low beyond the complete wind down of QE3. This would indicate the first rate hike would likely come in the first half of 2015. A hawkish outcome could be as simple as the FOMC not changing its forward guidance policy.

As traders await the FOMC meeting to conclude, the EURUSD is engaged in a consolidation pattern that can often precede a breakout (as is the USDJPY). Today is a perfect storm of fundamental event risk and actionable trade setups.

EURUSD Daily Chart: August 6, 2013 to Present