Forex. EUR/USD Review: Macroeconomic Review on September 15-19 – ForexNews.PRO

FOMC September 17: Communication is more important than a rate decision

With a virtually guaranteed rate cut of 25 bps, the fate of EUR/USD and the S&P 500 will depend on Powell’s tone and the revision of the Fed’s forecasts. Markets have set extremely optimistic expectations, but history shows that even expected declines can be shocking if the central bank sounds more cautious than forecasts.

The EUR/USD currency pair is testing the key resistance of 1.1730, while the S&P 500 is trading at highs in the traditionally weak September. The extreme positioning of market participants and record activity in the short-term options segment create the potential for significant volatility regardless of the Fed’s decision. The key catalyst is that retail sales data the day before the meeting may adjust expectations at the last moment.

Macroeconomic context: Positive factors create a trap for bulls

The Federal Reserve system is approaching its September meeting amid radically changed market expectations. If investors did not plan any rate cuts at all in the winter, now the probability of a 25 basis point reduction has reached 96%, according to CME FedWatch. The reversal occurred after the August employment data, which showed an unexpected weakening of the labor market. The largest banks have radically revised their forecasts: Goldman Sachs now expects three declines by the end of the year, Morgan Stanley – two declines, and Bank of America has completely changed its position from conservative to aggressively dovish.

Superficially, the macroeconomic picture does support monetary policy easing. The dollar index declined from annual peaks of 110+ to the current 100 points, the yield on 10-year Treasury bonds fell from 4.7% to 4.0-4.1%, and gold reached a record $3,640 per ounce. Oil prices in the range of $62-65 per barrel create a favorable disinflationary environment.

However, it is these positive factors that form the basis for potential disappointment. When everything is going “according to plan” and the markets are unanimous in their expectations, any deviation from the ideal scenario can trigger a sharp correction of crowded positions.
The data on retail sales on September 16 is a critical risk. Over the past three months, consumer spending has consistently exceeded analysts’ forecasts, which may complicate the Fed’s task of justifying aggressive policy easing in the face of sustained consumer demand.

Positioning and option flows reveal structural imbalances

An analysis of the positioning of market participants reveals the classic signs of “crowded trading”, which historically precedes sharp reversals. Commodity Futures Trading Commission data shows an extreme discrepancy between the categories of participants in EUR/USD: asset managers have accumulated net long positions of +374,328 contracts, while dealers hold massive short positions of -474,799 contracts.
This polarization creates structural instability. Long positions of managers reflect a bet on the weakening of the dollar with the easing of the Fed’s policy, but their concentration means that any disappointment in dovish rhetoric can trigger a cascade of forced closing of positions.

The trading volume of one-day options on the S&P 500 has reached a historic high of 1.23 million contracts daily, which is twice the average of 2024. This reflects the participants’ desire for maximum short-term hedging in conditions of high uncertainty.

An analysis of specific EUR/USD option positions reveals a massive accumulation of put options above current price levels. Strikes 1.1900 and 1.1975 showed a sharp increase in open interest by +1,122 and +977 contracts, respectively, over the past week. This is a classic pattern of institutional hedging of long positions in the underlying asset.

The concentration of option activity between the levels of 1.1700-1.1730 creates natural magnetic zones that can both support the price during a decline and limit growth during breakout attempts. High open interest in these strikes means that market makers will actively hedge their positions, potentially increasing volatility as they approach key levels.

The volatility structure remains relatively calm: VIX9D is at the 27th percentile of the historical distribution, and VIX30D is at the 19th percentile. The contango structure of the time premium indicates the absence of acute systemic stress, but the short-term premium remains elevated precisely because of the uncertainty surrounding the Fed meeting.

Technical levels will determine the scale of the market reaction

EUR/USD is at a critical technical point, trading at 1.1730, a key psychological resistance that has been the ceiling for the pair over the past four weeks. This level has a special significance as a round number and coincides with the zone of maximum concentration of option positions.

The uptrend from the August low of 1.1392 remains technically intact, but needs a fundamental catalyst to continue. The key technical benchmarks are clearly defined: a break above 1.1730 opens the way to testing 1.1800, while a drop below the support of 1.1700 may accelerate the correction to the level of 1.1515.

The S&P 500 demonstrates technical strength, but faces multiple hurdles. The index at 6,584 points is only 1.2% away from historical highs, with an increase of 18.5% since the beginning of the year. Technical indicators remain positive: all key moving averages support an uptrend, and the relative strength index at the neutral 61.3 level does not show critical overbought conditions.

The sectoral rotation shows healthy signs of the rally expanding beyond the tech giants. The financial sector is showing a leading trend based on expectations of a positive impact of lower interest rates on lending activity, industrial companies benefit from the prospects for economic incentives, while defensive sectors naturally lose their attractiveness.

However, the technical picture is complicated by seasonal factors. September has historically been the worst month for the U.S. stock market, with an average negative return of -1.0% since 1950. The VIX volatility index traditionally shows the largest monthly growth in September (+8.2% on average), reflecting the increased nervousness of participants.

The current 10.1% growth rate from the beginning of the year to September 1 already exceeds the median annual forecasts of most Wall Street strategists, creating natural incentives for profit-taking among institutional investors ahead of quarterly reports.

Historical precedents: when right decisions lead to wrong reactions

The Fed’s December 18, 2024 meeting provides an ideal precedent for understanding current risks. Then, as now, the markets were highly likely to expect a rate cut of 25 basis points, and the Fed really lived up to these expectations. However, the S&P 500 ended the day down 2.95%, while EUR/USD lost over 150 pips.

The reason was the hawkish revision of long-term forecasts in the so-called dot plot – the number of expected rate cuts in 2025 was reduced from four to two. Chairman Powell stressed the need for a “more cautious pace next year,” which dramatically changed the perception of the monetary policy outlook by the markets.

Statistical analysis of EUR/USD reactions to the Fed’s decisions shows characteristic patterns of volatility. In the first 15 minutes after the decision is published, the typical range of movement is 50-100 pips, expanding to 150-250 pips within 24 hours. With dovish surprises, the pair usually demonstrates a rally of 100-150 pips in the first hour of trading, while hawkish decisions provoke falls of 75-125 pips.

Long-term statistics for the S&P 500 after the first rate cut in the easing cycle show an average return of +7.6% over 12 months with a median of +11.9%. However, the range of results is extremely wide – from -24% to +41%, which highlights the high uncertainty of monetary policy transition periods.

Possible scenario: the paradox of “selling after the fact” with positive news

An analysis of the current positioning, technical picture, and historical precedents indicates a high probability of a paradoxical scenario where an expected and fundamentally positive decision by the Fed leads to a negative market reaction. The probability of such a development is estimated at 65-70% based on the following factors.

When 96% of participants expect the same outcome, and futures markets have already priced in 1.13 rate cuts (more than one meeting can provide), any deviation from the ideal scenario triggers a massive rethink of positions.

The Fed will lower the rate by the expected 25 basis points, but the tone of communication will be less dovish than markets expect. Even Powell’s neutral comments about the “dependence of further decisions on economic data” or the mention of the “need for a balanced approach” can be perceived as disappointment after months of increasing expectations of aggressive easing.

The specific dynamics of EUR/USD suggests a classic “false breakout” pattern. The initial reaction to the rate cut will lead to an increase in the pair to the levels of 1.1750-1.1760, which is 20-30 pips higher than the current resistance of 1.1730. However, any signs of caution in the Fed’s comments will provoke a sharp reversal with a test of the 1.1650 support and a potential decline to 1.1600. The total range of movement will be 80-130 pips in the bearish direction.

This forecast is based on an analysis of similar situations in 2018 and 2019, when EUR/USD showed an average drop of 95 pips within 24-48 hours after the “disappointing” decisions of the Fed with an initially positive reaction.