Market to focus on Fed's comments

Forex News and Events

Confusing Fed Comments (by Peter Rosenstreich)

With traders returning after the Easter break, global markets will be focused on Fed Chair Yellen’s speech at the Economic Club of New York (@17:20 GMT). Last week markets got another dose of conflicting statements made by senior Fed officials over how the monetary policy path is likely to unfold this year. The Fed “dots” suggest that most Fed member anticipate only two 25bp hikes this year. This is a view that was reinforced by Yellen’s comments at the FOMC press conference and a reiteration of the statement that rate hikes are likely to be gradual. Yet, judging from known hawk Fed Bullard’s definite comments, a rate hike should be on the table for the next meeting in April. The disharmony and lack of clarity has become alarming. For USD traders the conflicting view makes forecasting challenging, as EURUSD range consolidation indicates. We suspect that a majority of Fed members would like to keep rates lower for longer yet the healthy US data supports a divergent path. During Yellen’s speech today it is unlikely that she will dramatically shift market expectations, even though it will clearly generate short-term volatility, rather she will continue to highlight that the timing of the next rate hike will be determined by incoming data. Markets are pricing in 50/50 probability of a June rate hike which we feel to be slightly over optimistic considering the softer economic data. Given our outlook we suspect that USD has further to decline as weak external data further weakens US domestic outlook. With regards to the potential for the USD to find buyers on the back of safe haven trades, we suspect that risk aversion will be temporarily sidelined (further recovery in EM and commodities) as global central bank policy remains supportive.

Mexico: Expected lower economic activity (by Yann Quelenn)

Today January economic activity will be released and is expected to print lower than December at 2.50% vs 2.56%. The Mexican economy is highly dependent on the United States and its oil revenues. Mexico’s curse is that its central bank needs to carefully follow the Fed’s monetary policy in order to avoid any capital outflow that would result from a narrowing rate differential. In 2015, the Mexican central bank changed the dates of its interest-rate decision based on the FOMC's meeting dates in order to be more reactive to any change in US monetary policy. In other words, it wants to ensure it can respond to an increase in US borrowing costs.

It is clear that in the event of a rate hike, Mexico’s economy will be at stake as the country continues to pay the price for its lack of investments in its industry sector, in particular its oil industry. With an out of date infrastructure the country simply does not have a fighting chance to compete in the oil market. Nevertheless, we believe that the health of the US domestic economy is overstated and believe that no further rate hike will happen this year. The dovish stance is clearly retreating and unfortunately for Mexico, we should therefore see further weakening in the USDMXN.

EUR/CHF - Weakening

The Risk Today

Yann Quelenn

EUR/USD is moving sideways around 1.1200. Hourly resistance still lies at 1.1376 (11/02/2016 high) while hourly support is given at 1.1149 (intraday low). Stronger support is located a 1.1058 (16/03/2016 low). Expected to show further consolidation. In the longer term, the technical structure favours a bearish bias as long as resistance at 1.1746 ( 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 deterioration implies a gradual decline towards the support at 1.0504 (21/03/2003 low).

GBP/USD has now entered a short-term rangy mode. Yet, the medium-term technical structure is clearly bearish. Strong hourly resistance is given at 1.4514 (18/03/2016 high) while hourly support can be found at 1.4033 (03/03/2016 low). A break of strong resistance at 1.4668 (04/02/2016) is needed to show a reverse in the medium-term momentum. The long-term technical pattern is negative and favours a further decline towards key support at 1.3503 (23/01/2009 low), 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's medium term momentum is clearly negative. Yet, on the short-term, the pair keeps on strengthening. Hourly resistance is approaching 114.00. hourly resistance is given at 113.74 (intraday high). Stronger resistance is given at 114.91 (16/02/2016 high). Hourly support is given at 110.67 (17/03/2016 low). Expected to show continued increase in the short-term. We favour a long-term bearish bias. Support at 105.23 (15/10/2014 low) is on target. A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems now less likely. Another key support can be found at 105.23 (15/10/2014 low).

USD/CHF's short-term momentum is bullish. Yet, the pair is struggling to go any higher. Hourly support can be found at 0.9651 (11/02/2016 low). Hourly resistance is located at 0.9913 (16/03/2016 high). Expected to show further consolidation towards 0.9800. In the long-term, the pair is setting highs since mid-2015. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours a long term bullish bias.

Resistance and Support: