The U.S. Federal Reserve is widely expected to announce a 50-basis-point rate hike and plans for a running down of its balance sheet later on Wednesday nL2N2WR0P2. The potential for a significant move in the U.S. dollar will hinge on Fed Chair Jerome Powell's press conference.
The Fed will not be providing economic or dot-plot forecasts at this meeting and its statement is likely to remain hawkish nL2N2WU1Q7. The wild card will be Powell's response to whether the Fed is prepared to hike by 75 basis points at future meetings.
If the Fed Chair says "all options are on the table" and doesn't qualify the remark, it will be viewed as meeting or exceeding hawkish expectations and the EUR/USD will fall sharply, while risk assets slide and Treasury yields break higher.
If Powell echoes Cleveland Fed President Loretta Mester (a hawk) in indicating that rate increases exceeding 50 basis points are not currently required, the Fed event will be viewed as falling short of the most hawkish expectations nL2N2WK1Z0.
This could lead to profit-taking on EUR/USD shorts and a relief rally in risk assets.
A hawkish interpretation of Powell's press conference would probably result in EUR/USD making tracks towards the 2017 trend low at 1.0340.
A less hawkish interpretation would likely see the pair test or break above the 10-day moving average around 1.0615.
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