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Euro-Dollar Rate to be Supported by FOMC says BMO Capital, Citi

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Above: Federal Reserve Chairman Jerome Powell. Image © Federal Reserve.

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The results of the January 26-27 Federal Reserve Open Markets Committee (FOMC) meeting will be made known on Wednesday, and it should prove to be supportive for EUR/USD according to one analyst we follow.

FOMC events typically see the Fed change monetary policy settings or change guidance as to where monetary policy might go in the future, as a result they are key drivers for foreign exchange markets.

Consensus expects no change at this week's FOMC, but the messaging put across by Chairman Jerome Powell and his team could prove important for markets.

"We can't see why the Fed would go out of its way to damage risk sentiment this week," says Stephen Gallo, European Head of FX Strategy at BMO Capital Markets.

Gallo says on balance the FOMC event should prove to be supportive of the Euro-to-Dollar exchange rate (EUR/USD) as a result.

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However, BMO Capital tell clients they think that the outcome of the FOMC is already widely discounted into foreign exchange markets already, meaning major directional currency moves are unlikely.

"Our preference in EURUSD is to continue waiting for pullbacks before adding to EUR longs, with the 1.2050/1.2100 range last week proving to be solid near-term support," adds Gallo.

Meanwhile, Ebrahim Rahbari, Global Analysis Global Head at CitiFX expects the Fed to repeat and reinforce its existing message of dovishness - i.e. lower rates and generous quantitative easing measures for longer.

He says this is still significant given the recent taper discussions and other central banks’ considerations to adapt policy.

The Dollar was last week bid higher and stock markets showed nerves as expectations for the Fed to withdraw support were brought forward by the market, largely driven by rising inflation expectations.

This shift in market pricing was reflected via higher yields being paid on various tenors of U.S. government debt, a development that increases the overall cost of borrowing in the economy and therefore poses a headwind to economic growth.

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But, most analysts we follow say the Fed will want to avoid causing unnecessary stresses in the market at this point and will emphasise it remains dedicated to a supportive stance.

Citi expect no changes to policy or messaging at this meeting: "now is not the time", in Chair Powell’s own words.

"A dovish surprise would be to point towards plans of adding stimulus, while a hawkish risk would be suggesting that tapering discussions could be relevant in the coming months," says Rahbari.

Citi tell clients they remain bearish on the U.S. Dollar and see scope to re-engage in USD shorts.

"Dovish Fed policy is a key driver for our view of upside in risk assets and bearish USD view. We therefore continue to watch Fed-speak and potential policy changes closely," says Rahbari.

While some see the FOMC as being supportive of the Euro, we reported yesterday that strategists at TD Securities are bearish on the EUR/USD this week.

TD Securities are looking to sell the Euro and buy the Dollar in their trade of the week, based on a view that the currency market is at a cross roads.

In a briefing to clients out on January 25, Mazen Issa, Senior FX Strategist at TD Securities says, "we think currency markets are at a crossroads with a well-established but well advanced theme of USD shorts."

"Risk sentiment could struggle to find near-term highs just as the global growth backdrop shifts lower, leaving us inclined to hold a sell on rallies posture for the EUR. With this in mind, we implement a short EURUSD position as our Trade of the Week," says Issa.

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