'Upbeat rhetoric at FOMC meeting would drive USD broadly higher' - Ilya Spivak, DailyFX

   Ilya
Spivak

PROFILE:
• Current Job:  Currency Analyst at DailyFX.
• Career: He holds degrees in Economics and International Relations from the University of California.

View profile at FXStreet

Ilya Spivak applies a global macro approach his analysis, taking a longer-term view on investing in the G10 currencies that often incorporates cross-market relationships and geopolitics. Ilya’s research has appeared on CNN Money, Reuters and Bloomberg News. Before DailyFX, Ilya spent a number of years in FX Sales and as a Researcher at the Center for International Trade Development. He holds degrees in Economics and International Relations from the University of California. Ilya authors a number of regular articles for DailyFX.com.

Do you think that the markets underestimate the gravity of the situation in Ukraine? How do you expect the situation to develop?

As with all fundamental news-flow, the situation in the Ukraine ought to be sized up in terms of its broader implications for global growth and monetary policy. As tragic as recent developments have been, their ability to meaningfully impact the overall financial markets seems limited for now. One possible scenario that can be envisioned is an upward shock to European inflation readings if expanded sanctions on Russian oil and natural gas exports push up regional energy costs. That can potentially slow ECB stimulus expansion and offer a temporary lifeline to the Euro, but such a turn of events seems distant at the moment.

What do you expect from the FOMC at its next week's monetary policy meeting?

The Fed looks set to continue tapering QE until the program is wound down in October. That much is probably priced in already, with the markets focused on the length of the time gap between the end of asset purchases and the first interest rate hike. With that in mind, the tone of the policy statement will be important. A cautious posture would be status quo and thereby seems unlikely to stoke significant volatility. That puts surprise risk on the hawkish side of the spectrum, with relatively upbeat rhetoric likely to drive the US Dollar broadly higher if it emerges.

Do you see the new stress test rules, announced recently by the ECB, as too harsh for the Eurozone lenders?

For us as traders, qualifying the ECB’s stress test rules as “too harsh” or “too lenient” is ultimately a moot point. The important question is whether the exercise has been structured such that more lenders will have to raise capital to meet its requirements, which would imply a draining of liquidity that potentially beckons counter-measures by way of expanded monetary stimulus. Needless to say, such a turn of events would compound downward pressure on the Euro.

As the EUR/USD broke below the 1.3500 area many experts are calling for further declines. Do you see a bearish continuation in the weeks ahead?

The path of least resistance for the Euro continues to point downward. The ECB is the only major central bank that is actively moving in a more dovish direction along the monetary policy spectrum. That puts the single currency at a distinct disadvantage against nearly all of leading counterparts and not just the US Dollar. 

Since its July 15 top of 1.7190, the GBP/USD fell around 190 pips to test the 1.7000; In your opinion, what are the levels to consider in the GBP/USD short-term forecast?

In the near term, the spotlight is on 1.6900. A close below that would overturn the year-to-date uptrend and open the door for a larger reversal, with the next major inflection point at 1.6750. Major resistance is now in the 1.7000-40 area.

The USD/JPY remains to trade above the 200-day MA at 101.10 but experts are calling for further declines below the 100.00 area. What do you think?

Broadly speaking, USDJPY has been confined to an increasingly narrow range above 101.00 since the beginning of the year. This is likely to continue for the time being as investors weigh the end of “QE3” and eventual Fed tightening against the possibility of BOJ stimulus expansion. If the prospect of US stimulus withdrawal prompts risk aversion and encourages an unwinding of carry trades, USDJPY is likely to be caught up in broader Yen strength and move lower. Sequentially speaking, this is likely to precede BOJ stimulus expansion, which probably won’t materialize until 2015. The markets seem determined to ride out the current risk-on trend as long as possible however, so timing the shake-out will prove difficult. It seems most prudent to let the down move occur and look for buying opportunities as further BOJ easing and rising US yields ultimately align to send USDJPY significantly higher in the longer term.