Dear Traders,
There was no trend in the EUR/USD Tuesday as investors stayed on the sideline before the highly anticipated FOMC announcement. By contrast, the trend was clear in the British pound which fell towards 1.4120, which are more than 300 pips lower compared to its high late last week. The latest sell-off in the cable was driven by renewed fears of a Brexit revived by an opinion poll in The Telegraph that suggests that there is a majority in favor of leaving the EU. Any pro-Brexit indications are poison for sterling and will keep the currency under pressure as long as a potential Brexit remains on the table. A next support could be at 1.4060/50 whereas resistances are seen at 1.4250 and 1.43.
The U.K. Labor Market report is scheduled for release at 9:30 GMT and any disappointments could drive GBP/USD even lower towards 1.40. However, stronger numbers may lead to small pullbacks but any gains are likely to be limited ahead of FOMC. Furthermore, Mr Osborne will deliver his budget to the parliament at 12:30 GMT, which may have a short-term impact on the pound.
All eyes will be on the Federal Reserve's monetary policy statement today at 18:00 GMT followed by a press conference where Fed chair Janet Yellen may provide hints on the Fed's forward guidance. Yellen and her colleagues have an opportunity to clarify where they stand on the outlook for additional tightening. While the dollar rally was recently overshadowed by a pessimistic mood with market participants pricing in not more than one increase in 2016, the outlook could be more optimistic this month. Fed policy makers will unveil new projections for the appropriate pace of rate hikes for the first time since they raised rates in December. The Fed's "dot plot" forecast will probably show a median forecast for three increases this year, which is still far more than the market's expectations of only one rate hike. In case the committee describes the risks to the economy as "nearly balanced", showing less concern over a global slowdown, it could be a hawkish surprise for the market which could result in a renewed dollar rally. Downside risk assessments on the other hand are an indication that rate hikes are off the table for at least six months. While nobody expects the Fed to raise rates today, an imminent rate hike in June is not expected either. If the FOMC statement reflects an optimistic approach towards the coming months, market participants will rush to price in a June hike.
Before the important statement, traders should keep an eye on U.S. Consumer Prices due for release at 12:30 GMT.
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