FOMC decision won't necessarily be a binary outcome for USD

20 September, 2016

Risk is on the menu at the start of this new week with stocks, crude oil and commodity currencies all climbing higher, while the dollar is easing back slightly after Friday’s rally. The weaker dollar has also boosted the GBP/USD, which has bounced off the 1.30 handle, and to a lesser degree the EUR/USD. With the Japanese markets being closed overnight and the economic calendar very light, today’s movements in the financial markets may well be due to profit taking and/or positioning ahead of the much-anticipated FOMC and BoJ meetings on Wednesday.

Friday’s forecast-beating US CPI inflation was the last significant data ahead of the Federal Reserve meeting. Other economic pointers from last week were mostly weaker than expected. The mixed-bag data therefore ensures that the “will they or won’t they” uncertainty continues for a few more days at the very least. But it is not a binary outcome, however. If the Fed puts the rate hike on hold, this does not necessarily mean the dollar will fall off a cliff this week. After all, central banks elsewhere are even more dovish than the Fed. What’s more, with the probability of the Fed tightening in September having fallen sharply in recent times, the market is probably no longer positioned for a rate rise anyway. Thus, in the event that the Fed remains on hold, the dollar could suck the sellers in with a short-term sell-off before squeezing them with an ever sharper rally. Obviously, the key risk here is that the Fed delivers a surprise rate increase or at the very least hints strongly at the prospects of a rate rise before the end of the year. In these potential scenarios, the dollar would almost certainly stage a vicious rally, potentially causing the EUR/USD to tumble.

At the moment though the trend on the EUR/USD is very vague. On the one hand, you have the 50 and 200 day moving averages both pointing higher which objectively tell us that on average price has been rising over the past 50 to 200 days at least. But on the other hand, the moving averages are lagging indicators and they don’t tell us anything about the now moment or the future (no indicator does). Indeed, the bears would argue that price action has been bearish recently: a bullish trend line has already been taken out in July and the underside of it has since turned into resistance.

Overall, it is safe to say that the Fibre is basically stuck in consolidation, although the most recent price action has been somewhat bearish. As such, we are leaning more towards the bearish argument than bullish in the EUR/USD exchange rate and thus expect to see lower prices in the days to come. Obviously a big caveat here is that if the Fed is surprisingly dovish on Wednesday then we will have to put our technical views to one side. In any case, price action, especially on Wednesday, should provide us a big clue in terms where the EUR/USD is headed over the coming weeks.

As far as today’s session is concerned, the EUR/USD has once again bounced off the 1.1150 area, roughly where the 50 and 200 day moving averages converge. So far, it hasn’t been a meaningful bounce, which suggests that there may be strong downward pressure on the EUR/USD. The next level below here is at 1.1125, the low from the last day of last month. Further lower is the 61.8% Fibonacci retracement level against the July low, at 1.1085, followed by the next support and 78.6% Fibonacci level around the 1.1010-1025 area. In terms of resistance, the key level to watch is around the 1.1200-1.1220 area (shaded in red). As can be seen, this area was previously support and so it could turn into resistance upon a potential re-test. Should we get above here then 1.1250 could be an interesting level to watch, for not only does this correspond with Friday’s high but also a short-term bearish trend line.


Source link  
Markets turn focus towards Trump address to Congress

On the evening of Tuesday, February 28th, US President Trump is slated to give a major address to a joint session of Congress in lieu of the usual State of the Union address...

FOMC meeting minutes signal rate hike fairly soon – dollar unimpressed

The minutes from the most recent FOMC meeting three weeks ago – the first such meeting since Donald Trump’s presidential inauguration – were released on Wednesday afternoon...

Crude oil look set to resume bullish trend

Oil prices have been coiling for several weeks now with both contracts spending most of their time in a tight four dollar range...


US stocks could rise 6-7% further before potential crash

The US stock markets hit repeated new record highs last week. The positive sentiment has continued at the start of this week, with Asian and European markets drifting higher in an otherwise quiet day. US index futures point to further gains at the open later on...

Fed gives little indication of interest rate trajectory

The Federal Open Market Committee (FOMC) meeting has come and gone, and little has changed in the financial markets as a direct consequence. In unanimously deciding to keep interest rates unchanged, as widely expected...

Surging equities at risk ahead of earnings season

While earnings season has started on a very positive footing, however, banks and other financial companies were already expected to shine more than others due to rising interest rate expectations. As non-financial companies begin to report in the coming weeks...


Gold rebound heading for major resistance

For more than two weeks, the price of gold has been in a strong rebound from its late-December bottom around the $1125 level. This rebound follows a sustained drop in price that began from the July highs around $1375 and followed-through to the December lows...

Crude oil at higher plateau ahead of US inventory data

Crude oil prices have recently been lifted to year-to-date highs on a successful agreement to cut oil production and control supply among major OPEC and non-OPEC oil producers...

Gold rebounds off key level ahead of busy week

As we reported the possibility on Friday of last week, gold did indeed fall further lower this week. The rising dollar, yields and US equity prices all weighed on the appeal of the buck-denominated, noninterest-bearing and perceived safe-haven precious metal...

  


Share: