USD Dominates Forex Moves

Forex News and Events

In a move that appeared like it might never occur, the FOMC ended its current round of QE by cutting purchases of treasuries and MBS $15 billion to $0. The overall tone of the FOMC statement was notably more hawkish than expected and a clear divergence from recent market moves, which was pricing in a later start to interest rate tightening. The Fed acknowledged that the labour market was trending in the correct direction, emphasizing that “labor market conditions improved somewhat further, with solid job gains and a lower unemployment rate.” The second part of the sentence was new and highlights policymakers confidence in the labor market. The Fed goes on to say that “a range of labor market indicators suggests that underutilization of labor resources is gradually diminishing,” steering away from the proposition of underutilization. The Fed did acknowledge that weaker inflation trend and falling energy prices yet emphasized these driver were transitory, not a driver of longer-term trend, stating that “survey-based measures of longer-term inflation expectations have remained stable.” Cleary this indicates that should inflation continued to trend lower in the near term the Fed will be unconcerned by stating “the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year.” Yesterday’s vote to end QE was 9-1, with Minneapolis Fed President Kocherlakota dissenting because he believe the FOMC should continue its asset purchase program at $15bn till “at least until the one-to-two-year ahead inflation outlook has returned to 2 percent.” But what traders were really interested in was guidance on the timing of the impending tightening cycle.

FOMC preserved its statement that zero interest rate policy would remain “for a considerable time following the end of its asset purchase program this month.” Yet created some flexibility (making its rate hike guidance more data dependent) and potentially pulling in the first hike by adding “if incoming information indicates faster progress toward the Committee’s employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated.” An on a final note, the statement never mentioned risk associated with the stronger USD or weaker external growth.

The market’s reaction was typical. In foreign exchange, USD got a big boost verse all G10 and EM currencies as the DXY climbed above 86.00. Initially equity markets fell but were able to recover well off the lows. With the Fed taking a more optimistic tone on the US economy, equity traders are struggling to decide whether to trade the strong US economic recovery or the tighter policy. Treasuries declined, as event driven trading models kicked.

Overall, our analysis has not changed. We believe that strengthen in the US economy will continue spearheaded by a falling unemployment rate. It’s unlikely that external headwinds will be stout enough to disrupt the current recovery and therefore the FOMC will kick off its tightening cycle in June 2015. With US bonds, particularly at the front end of the curve, on offer post-FOMC the USD should continue to strengthen verse most currencies. Forex trading strategies should be geared towards long USD. On the forex technical front, EURUSD made a key reversal pattern suggesting further downside targeting 1.2501 support. In commodities, gold and silver came under heavy selling pressure as day trading strategies saw the break of $1222 as a key trigger.

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Today's Key Issues (time in GMT)

2014-10-30T07:00:00 GBP Oct Nationwide House PX MoM, exp 0.30%, last -0.20%, rev -0.10%
2014-10-30T07:00:00 GBP Oct Nationwide House Px NSA YoY, exp 8.50%, last 9.40%
2014-10-30T07:00:00 CHF Sep UBS Consumption Indicator, last 1.35, rev 1.28
2014-10-30T08:00:00 DKK Sep Unemployment Rate SA, exp 3.90%, last 3.90%, rev 4.00%
2014-10-30T08:00:00 DKK Sep Unemployment Rate Gross Rate, exp 5.00%, last 5.00%
2014-10-30T08:00:00 CHF Oct KOF Leading Indicator, exp 99.2, last 99.1, rev 99.3
2014-10-30T08:30:00 SEK Aug Wages Non-Manual Workers YoY, last 2.50%
2014-10-30T09:30:00 GBP Oct Lloyds Business Barometer, last 57
2014-10-30T10:00:00 EUR Oct Economic Confidence, exp 99.7, last 99.9
2014-10-30T10:00:00 EUR Oct Industrial Confidence, exp -5.5, last -5.5
2014-10-30T10:00:00 EUR Oct F Consumer Confidence, exp -11.1, last -11.1
2014-10-30T10:00:00 EUR Oct Services Confidence, exp 3.1, last 3.2
2014-10-30T10:00:00 EUR Oct Business Climate Indicator, exp 0.05, last 0.07
2014-10-30T12:30:00 USD 25.oct. Initial Jobless Claims, exp 285K, last 283K
2014-10-30T12:30:00 USD 18.oct. Continuing Claims, exp 2352K, last 2351K
2014-10-30T12:30:00 USD 3Q A GDP Annualized QoQ, exp 3.00%, last 4.60%
2014-10-30T12:30:00 USD 3Q A Personal Consumption, exp 1.90%, last 2.50%
2014-10-30T12:30:00 USD 3Q A GDP Price Index, exp 1.40%, last 2.10%
2014-10-30T12:30:00 USD 3Q A Core PCE QoQ, exp 1.40%, last 2.00%
2014-10-30T13:45:00 USD 26.oct. Bloomberg Consumer Comfort, last 37.7
2014-10-30T21:45:00 NZD Sep Building Permits MoM, exp 1.00%, last 0.00%

The Risk Today

EURUSD declined sharply yesterday. The break of the support at 1.2614 calls for a test of the recent lows at 1.2501. An hourly resistance now lies at 1.2639 (intraday high). In the longer term, EUR/USD is in a downtrend since May 2014. The break of the strong support area between 1.2755 (09/07/2013 low) and 1.2662 (13/11/2012 low) has opened the way for a decline towards the strong support at 1.2043 (24/07/2012 low). As a result, the recent strength in EUR/USD is seen as a countertrend move. A key resistance stands at 1.2995 (16/09/2014 high).

GBPUSD has successfully tested the resistance at 1.6184 (21/10/2014 high) and has broken the support at 1.5995. A decline towards the key support at 1.5877 is likely. Hourly resistances can be found at 1.6018 (intraday high) and 1.6072 (intraday low). In the longer term, given the significant deterioration of the technical structure since July, the strong resistance area between 1.6525 (19/09/2014 high) and 1.6644 (01/09/2014 high) is expected to cap any upside in the coming months. Monitor the current consolidation phase near the strong support at 1.5855 (12/11/2013 low).

USDJPY has broken the resistances at 108.35 and 108.74, alleviating any concerns of a weakening buying interest. A further rise towards the key resistance at 110.09 is likely. Hourly supports can now be found at 108.71 (intraday low) and 108.38 (27/10/2014 high), see also the rising channel). A long-term bullish bias is favoured as long as the key support 100.76 (04/02/2014 low) holds. Despite the recent decline near the major resistance at 110.66 (15/08/2008 high), a gradual move higher is eventually favoured. Another resistance can be found at 114.66 (27/12/2007 high). A key support lies at 105.44 (02/01/2014 high).

USDCHF has broken the key resistance at 0.9562, which improves the short-term technical structure. Resistances can now be found at 0.9625 and 0.9691. Hourly supports lie at 0.9559 (23/10/2014 high) and 0.9511 (28/10/2014 high). From a longer term perspective, the technical structure favours a full retracement of the large corrective phase that started in July 2012. As a result, the recent weakness is seen as a countertrend move. A key support can be found at 0.9301 (16/09/2014 low). A resistance now lies at 0.9691 (06/10/2014 high).

Resistance and Support: