Trading the Fed Preview: TD Securities

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TD Securities have issued their 'cheat sheet' for potential foreign exchange market outcomes in the wake of the Federal Reserve's July interest rate decision and guidance.

The strategy note shows the potential outcomes for the Euro to Dollar exchange rate (EUR/USD) under three scenarios: a hawkish outcome (20% probability), base case (65% probability) and dovish outcome (15% chance).

The decision is due at 19:00 BST.

Under the hawkish scenario the EUR/USD retreats back to parity as the market reacts to a 100 basis point interest rate hike.

Currently the market is firmly of the view a 75bp hike is likely, highlighting the initial surprise such a move would bring.

Under the hawkish scenario the Fed would also guide that further similar outsized hikes are likely, with Chair Jerome Powell saying in the press conference bringing inflation down remains the Fed's number one priority.

Under TD Securities' base case scenario the Fed meets the market's expectation with a 75bp hike and suggests further hikes are likely given inflation remains uncomfortably high.

"Powell suggests that the Fed is prepared to continue frontloading rate hikes as growth remains strong, opening the door to another 75bp move in September," says TD Securities.

Under the base case scenario the EUR/USD rate is seen trading at 1.0100.

The dovish scenario involves the Fed hiking by 75bp but offering a softer guidance.

This could see them play up the slowing in growth momentum and uncertainty about the outlook, according to TD Securities.

"Powell hints that a slowing in the pace of hikes is likely as the Fed becomes more cautious now that the neutral rate has been reached. The Chair flags slowing growth momentum as a material risk to the outlook," says the TD Securities.

Here the Euro would rally against the Dollar, taking EUR/USD to 1.0280. (Set your FX rate alert here).