Markets calm ahead of historic FOMC meeting

Forex News and Events

Japan manufacturing activity declines (by Yann Quelenn)

The Nikkei Flash Japan PMI index (Purchasing Manager’s Index) has edged down to 52.5 from 52.6 in November. The figure is approaching again the 50-level which means that a recession is not that far. Yet, any print above 50 indicates that the sector is expanding.

Earlier this week, Tankan survey has revealed that there is a better ongoing economic sentiment. It turns out that corporate capital spending as well as consumption were better-than-expected and drove GDP higher. Traders will closely look at the Q4 GDP data which will reveal the true nature of the current economic trend. Further positive signs would provide some relief to Japan PM Shinzo Abe and Kuroda from the BoJ from adding more stimulus to the economy.

We still remain bullish dollar against the yen, as there are still uncertainties about the state of the world third economy. The FOMC decision tomorrow should even provide some traction to the Greenback.

FOMC Decision (Peter Rosenstreich)

Finally, the big day is here and the waiting is over...hopefully. Stocks are higher but currencies and commodities are generally stable pre-Fed as we await the highly anticipated and overly hyped FOMC December meeting, which should result in the first rate hike in nine years. With a 25bp hike to the target Fed funds already universally priced in, investors will be listening for guidance on forward economic forecasts and a new tightening path or „dots“. While the press conference will be the primary focus, simply the action of raising rates should spark significant volatility (just remember most traders active today have never seen the Fed hike rates). We anticipate that Yellen will emphasize a gradual pace of rate hikes, the effect of USD pricing on decision and underline a generally dovish economic outlook. Trading USD for any extended directional move will be difficult yet we suspect that USD should strengthen on the result. First of all, pre-FOMC positing has been heavily short USD against the G10 (stronger against the EM currencies), while there is the possibility that Yellen could sound slightly less dovish in her US economic outlook, suggesting a quicker pace of rate hikes (the rate markets are positioned for shallow curves as US front-ends yields have been range bound this month, although rates have jumped in the last 48 hours). We remain constructive on the USD especially against EM and commodity linked currencies in the aftermath of today’s events. Especially if risk appetite remains cautions (volatility is rising across the board). EURUSD failed to close above the 200d MA at 1.1035 suggesting a period of exhaustion and further risk to downside support at 1.0880.

Risk building in high yield credit (Peter Rosenstreich)

We are unconvinced that global markets will stabilize after the FOMC decision, so traders should keep their vacations local. There have been worrying swings in high yield credit spreads (and Third Avenue's collapse) indicting the debt market’s anxiety with adapting to the new tightening era. As pointed out by the Financial Times today the $1.3tn junk bond markets has relied heavily on endless cheap money. While so far only the energy sectors have been truly effected we suspect that defaults will quickly spread as the cost of funding swiftly rises.

The Risk Today

Peter Rosenstreich

EUR/USD has declined again below 1.1000 after breaking hourly resistance at 1.1043 (09/12/2015). Hourly support lies at 1.0796 (07/12/2015 low). Stronger support lies at 1.0524 (03/12/2015 low). Expected to target resistance at 1.1096. In the longer term, the technical structure favours a bearish bias as long as resistance holds. Key resistance is located region at 1.1453 (range high) and 1.1640 (11/11/2005 low) is likely to cap any price appreciation. The current technical deteriorations favours a gradual decline towards the support at 1.0504 (21/03/2003 low).

GBP/USD's medium-term downside momentum remains lively. The pair is riding the downtrend channel. Hourly resistance is given at 1.5242 (13/12/2015 high). Stronger resistance can be found at 1.5336 (19/11/2015 high). Hourly support can be found at 1.4985 (02/12/2015 low). Expected to monitor support given at 1.4895. The long-term technical pattern is negative and favours a further decline towards the key support at 1.5089 , as long as prices remain below the resistance at 1.5340/64 (04/11/2015 low see also the 200 day moving average). However, the general oversold conditions and the recent pick-up in buying interest pave the way for a rebound.

USD/JPY is moving sideways with no real mid-term momentum. Hourly support can be found at 120.07 (28/10/2015 low). Hourly resistance can be found at 122.23 (11/12/2015 high). Expected to remain in range between support at 120.07 and resistance at 122.23. A long-term bullish bias is favored as long as the strong support at 115.57 (16/12/2014 low) holds. A gradual rise towards the major resistance at 135.15 (01/02/2002 high) is favored. A key support can be found at 116.18 (24/08/2015 low).

USD/CHF is consolidating above the former hourly support at 0.9876 (27/10/2015 low) while hourly resistance is given at 1.0034 (04/12/2015 high). Expected to show further decline. In the long-term, the pair has broken resistance at 0.9448 and key resistance at 0.9957 suggesting further uptrend. Key support can be found 0.8986 (30/01/2015 low). As long as these levels hold, a long term bullish bias is favoured.

Resistance and Support: