G10 consolidate post-FOMC levels, Swissy weakens the most

Forex News and Events:

The FX markets adjust levels to unexpected hawkish tone out of FOMC meeting yesterday. As Fed signals a first rate hike by mid-2015, the decent rush into USD squeezed technicals on G10 / USD price charts. In today’s newsletter, we focus on the hawkish shift in Fed policy outlook and the potential reasons behind. EURUSD trades below 1.3800 for the first time since March 6th ECB meeting, while USDCAD trades at fresh year highs. In Switzerland, the SNB kept the status quo while significantly downgrading inflation forecasts for 2014 and 2015.

FOMC Impact on G10 Levels

The FX trading was squeezed by unexpected hawkish tone out of the first FOMC meeting lead by Janet Yellen. In opposition to dovish market expectations, FOMC signaled a first rate hike by mid-2015 despite the weakness in latest economic data, simply “reflecting adverse weather conditions” according to Fed. The pace of rate cycle has been unexpectedly powered up. The prospects of further improvement in US jobs market seems to be a major factor in such shift in policy outlook. The unemployment forecasts were revised down from 6.3-6.6% to 6.1-6.3% in 2014, from 5.8-6.1% to 5.6-5.9% in 2015 and from 5.3-5.8% to 5.2-5.6% in 2016. The GDP and inflation forecasts saw no significant revision.

EURUSD spiked below the Feb-March uptrend bottom (1.3840) and extended weakness below 1.3800 in European session (below broader trend bottom at 1.3804). The MACD (12, 26) stepped in the bearish zone and will suggest further downside correction for a daily close below 1.3875. The key short-term support is placed at 1.3773 (Feb resistance), if cleared should reinforce the bearish trend in coming days.

GBPUSD failed to reverse trend yesterday. The positive reaction to supportive news (jobs data, BoE minutes & budget announcement) remained too weak to breach the 1.6650 barrier yesterday. The hawkish Fed sent the Cable below its 50-dma (currently at 1.6560). Bids are seen at 1.6500/10 area, stops are eyed below. The pair approaches Nov’13 – Mar’14 uptrend bottom (1.6454). The key support is placed at 1.6420 (100-dma).

USDCAD pulled out our 1.1236 (Fibonacci target) and rallied on stops to 1.1269 (highest since July 2009). The bullish momentum is now at full speed. Canada will release February CPI on Friday. The year-on-year expectations remain decently soft (despite improvement on m/m basis). Markets expect the CPI y/y down at 1.0% in February from 1.5% a month ago. Only a CPI surprise on the upside can taper the bullish appetite in USDCAD.

On a similar patter, the broad based USD demand sent USDJPY to its 50-dma.The MACD (12, 26) trend momentum indicator is to step in the bullish zone for a daily close above 102.65. Light option offers are seen at 102.75/85 if breached should intensify USDJPY gains. Walking into April, the dovish BoJ expectations are also an important supportive factor to send USDJPY back to its ascending trend. If markets stick to hawkish Fed view, focus will shift to 105.00/45 year highs.

SNB Keeps the Status Quo

The SNB kept the 3-month libor target unchanged at 0.00% in today’s meeting. The main focus has been the significant downgrade in inflation forecasts. The SNB revised the 2014 and 2015 inflation expectations by 0.2 percentage points to 0.0% and 0.4% respectively. The absence of inflation threat allows the SNB to sit comfortably on its dovish policy stance. The SNB is likely to remain committed to counter the CHF appreciation, especially now that the political tensions with the European countries (Switzerland’s leading trading partner with roughly 60% of total trades with EUR-denominated partners, 65% including UK) mounts due to Swiss decision to limit free circulation.

USDCHF advanced to 0.8849 for the first time in two weeks (at the time of writing). The external factors (mainly Fed) are drivers behind CHF depreciation since yesterday. Although the technicals turned on the upside, USDCHF remains at risk. The Swiss franc is subject to potential safe haven inflows as long as tensions between Russia/Ukraine occupy the headlines.

Today's Key Issues (time in GMT):

2014-03-20T12:30:00 USD Mar 15th Initial Jobless Claims, exp. 322K, last 315K
2014-03-20T12:30:00 USD Mar 8th Continuing Claims, exp. 2880K, last 2855K
2014-03-20T14:00:00 USD Mar Philadelphia Fed Business Outlook, exp. 3.2, last -6.3
2014-03-20T14:00:00 USD Feb Existing Home Sales, exp. 4.60M, last 4.62M
2014-03-20T14:00:00 USD Feb Existing Home Sales m/m, exp. -0.4%, last -5.1%
2014-03-20T14:00:00 USD Feb Leading Index, exp. 0.2%, last 0.3%

The Risk Today:

EURUSD declined sharply yesterday, breaching the key support at 1.3834. However, the support implied by the rising channel (around 1.3804) is intact. A resistance for a short-term rebound stands at 1.3880. Another support can be found at 1.3708. In the medium-term, the recent sharp decline coupled with general overbought conditions call for caution. A break of the rising channel would invalidate the ascending triangle formation and would open the way for further weakness. A key support stands at 1.3643 (27/02/2014 low).

GBPUSD made new lows yesterday and is now approaching the support implied by the rising channel (around 1.6454). Hourly resistances are given by the shorter term declining channel (around 1.6636) and 1.6666. In the longer term, a break to the downside out of the rising channel would negate the current bullish bias implied by the break of the resistance at 1.6668 (24/01/2014 high). A strong horizontal support stands at 1.6220 (17/12/2013 low).

USDJPY saw a bout of buying interest yesterday. The break of the resistance at 101.94 strengthens the resistance area between 100.76 and 101.20. Resistances stand at 102.87 and 103.76. An hourly support lies at 101.94 (previous resistance). A long-term bullish bias is favoured as long as the key support area given by the 200 day moving average (around 100.26) and 99.57 (see also the rising trendline from the 93.79 low (13/06/2013) holds. A major resistance stands at 110.66 (15/08/2008 high).

USDCHF rose sharply yesterday, breaching the resistance at 0.8816. However, a break of the declining trendline (around 0.8849) is needed to confirm a sustainable phase of strength. An hourly support lies at 0.8765 (previous resistance). Another resistance can be found at 0.8896. From a longer term perspective, the structure present since 0.9972 (24/07/2012) is seen as a large corrective phase. A break of the declining trendline is needed to improve the medium-term technical structure.

Resistance and Support: