The Big Picture

Pre-FOMC market gets a boost from China The market yesterday was dominated by positioning ahead of today’s FOMC meeting. The Wall Street Journal’s influential Fed reporter, Jon Hilsenrath, said he thought the Committee would keep the phrase in its statement that rates will remain low for a “considerable time” after the Fed’s bond-buying program ends next month (which I agree with) but qualify it somehow, either in the statement or during the press conference. The market focused on the likelihood that they would keep the “considerable time” phrase and Fed funds rate expectations dropped around 3 bps in the long end and USD headed lower. Then mid-morning US time, a Chinese web site reported that the government would supply additional liquidity to their five biggest banks to support the economy. Commodities soared (especially copper and oil) and equity markets recovered as the global growth picture suddenly looked a little better.

What to look for with the FOMC: Clearly, if they drop the “considerable time” phrase, USD is likely to rise sharply. A substantial rise in the Committee’s average estimate for Fed funds at end-2015 (now 1.2%) or 2016 (now 2.53%) would also be bullish for the dollar, in my view. In the press conference, Fed Chair Yellen could qualify the “considerable time” phrase by repeating something like her recent statement in Jackson Hole that “if progress in the labor market continues to be more rapid than anticipated by the Committee or if inflation moves up more rapidly than anticipated, resulting in faster convergence toward our dual objectives, then increases in the federal funds rate target could come sooner than the Committee currently expects and could be more rapid thereafter.” That too might be seen as hawkish and most probably send the dollar higher. On the other hand, if she does not include such a statement and instead emphasizes the recent weak labor figures, that could be negative for the US currency.

Our studies show that people wanting to take a view on the FOMC should do it in USD/JPY, not EUR/USD. USD/JPY has been more volatile than usual on FOMC days this year, whereas EUR/USD and GBP/USD have seen only average ranges. ECB days are more exciting than FOMC days for the euro, for obvious reasons.

Today’s market: During the European day, we get Eurozone’s final CPI for August and as usual the forecast is the same with the preliminary data.

In the UK, the Bank of England releases the minutes of its latest policy meeting. It will be interesting to see if there were any more dissenting voters or if the two dissenters in July changed their stance given the increased uncertainty surrounding the Scottish referendum. The country’s unemployment rate for July is also coming out and the forecast is for the rate to decline further. Average weekly earnings are also coming out and the market expects a rebound in July’s reading. In addition, during the day several polls are expected to be published the day before the Scottish referendum, which will give us a final view of the tight race. While this particular economic data would usually be key for GBP, I expect the Scotland news to dominate trading today.

Sweden’s Riksbank also releases the minutes of its September policy meeting, when it held the repo rate unchanged despite the recent return of deflation to Sweden. The minutes could provide signs of additional actions from the Bank mainly to fight deflationary risk. In the country’s recent general election, the center-left party won but did not achieve a majority, which leads to a complicated process of forming a government. The uncertainty from the elections, the weak economic data and the need for further policy easing could further weaken SEK.

Aside from the Fed, the US CPI for August and the National Association of Home Builders (NAHB) market index for September are due out today.

The Market

EUR/USD finds resistance marginally below 1.3000

EUR/USD moved higher yesterday, after China decided to inject 500bn Yuan to the country’s five biggest banks, triggering an appetite for risk across the globe, and after the WSJ reported that the Fed will most likely maintain the “considerable time” language in its statement. The pair’s advance was halted by the lower boundary of the blue downside channel, connecting the highs and the lows on the daily chart, a few pips below the psychological line of 1.3000 (R1). I will hold the view that the overall picture remains negative and I would expect a dip below the support of 1.2860 (S1) in the near future to open the way for the key support zone of 1.2760 (S2). However, most of today’s movement will be driven by the FOMC statement, the updated forecasts and the press conference held by Chair Yellen after the rate decision.

Support: 1.2860 (S1), 1.2760 (S2), 1.2660 (S3).
Resistance: 1.3000 (R1), 1.3100 (R2), 1.3160 (R3).

GBP/USD fills the gap

GBP/USD moved higher yesterday, filling the gap we saw last week. The technical picture suggest that the pair remains in a retracing mode. The rate started printing higher highs and higher lows within the purple minor-term channel, but still remains below the blue downtrend line drawn from the high of the 15th of July. Only a move above the psychological line of 1.6500 (R3) would confirm the upside break of the downtrend line and perhaps flip the short-term picture positive. However, one day ahead of the Scottish independence referendum, I would prefer to stay on the sidelines as the outcome could change the whole outlook of the pair. I would like to take a view on the picture the results will paint afterwards.

Support: 1.6160 (S1), 1.6070 (S2), 1.6000 (S3).
Resistance: 1.6315 (R1), 1.6460 (R2), 1.6500 (R3).

EUR/JPY rebounds from near 138.45

EUR/JPY moved above the upper line of the downside channel (containing the price action since April) last week. After pulling back on Monday, the pair found support near 138.45 (S1) and rebounded somewhat. Since the rate is now trading above the upper bound of the aforementioned channel I would see a cautiously positive picture. The reason I am a bit mindful regarding further upside is that our momentum studies have not confirmed the price action yet. The RSI, although above 50, is pointing down, while the MACD stays below its trigger and is pointing down. A break above 139.20 (R1) is the move that would confirm a forthcoming higher high and perhaps set the stage for extensions towards the psychological line of 140.00 (R2).

Support: 138.45 (S1), 138.25 (S2), 137.65 (S3).
Resistance: 139.20 (R1), 140.00 (R2), 141.00 (R3).

Gold trading virtually unchanged

Gold moved somewhat higher on Tuesday, but it found resistance at the lower line of the purple downside channel, connecting the highs and the lows on the daily chart, marginally above the 1240 (R1) barrier, before declining to trade virtually stable. I will keep my stance that the overall trend remains to the downside. The price structure remains lower peaks and lower troughs below the prior black support line, drawn from back at the low of the 31st of December. However, I would adopt a “wait and see” approach ahead of the FOMC decision. Another reason I would like to take the sidelines for now is that our momentum studies are still pointing up. I still believe that it is better to wait for a dip below the 1220 (S2) line before getting more confident about the downtrend.

Support: 1225 (S1), 1220 (S2), 1200 (S3).
Resistance: 1240 (R1), 1250 (R2), 1260 (R3).

WTI rallies on OPEC target

WTI rallied, breaking above 93.95, the upper boundary of the range it’s been trading since the 5th of September, amid reports that OPEC may cut crude-output targets next year. I would expect the move above 93.95 to have further bullish extensions and target our resistance hurdle of 96.00 (R1) in the near future. The continuation of the bullish wave is also supported by our daily momentum studies. First of all, I see positive divergence between the price action and both the daily oscillators. Moreover, the daily MACD lies above its signal line and is pointing up, while the 14-day RSI just crossed above its 50 line.

Support: 93.35 (S1), 90.70 (S2), 90.00 (S3).
Resistance: 96.00 (R1), 96.70 (R2), 98.45 (R3).

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