Whether the FOMC remains 'patient' is crucial to the near term dollar outlook

Market Overview

Forex markets have settled down as we run up to the announcement by the Federal Reserve on its latest monetary policy. The dollar strength seen over the recent weeks would suggest the market is betting on a slightly hawkish move, and all the talk has been on just one word, “patient”. If the Fed removes “patient” from its statement today it would be a signal to the markets that it is preparing for the next phase of monetary policy. That next stage would be actual tightening. Although a large majority of the analyst community see “patient” being removed (according to CNBC), nothing is guaranteed with central banks and there could be a surprise still. Hence the consolidation.

Wall Street closed lower last night with the S&P 500 off around 0.3%, whilst Asian markets were reasonably positive with the Nikkei 225 around 0.5% higher. The European indices are trading marginally higher at the open, however it is unlikely that there will be too much direction in front of what could be such a crucial decision from the Fed.

Forex trading has moved into a consolidation phase now and this is likely to continue throughout the day until we hear from the Federal Reserve at 1900GMT. There is little real direction from major forex pairs although the Aussie and Kiwi dollars are under slight pressure from weaker commodity prices.

The Federal Reserve statement is due at 1900GMT which will then be followed by Janet Yellen’s press conference at 1930GMT at which stage she will be grilled on policy developments. However, the Fed is not the only player in town today and sterling/UK traders will be watching out for a trio of updates. First of all the meeting minutes from the Bank of England at 0930GMT. There is no change expected to the voting with 9-0-0 expected as all off the committee continue to vote for no change. The unemployment data is also at 0930GMT and is expected to show a slight drop in the rate to 5.6% as the claimant count is expected to drop by a further 30,000. The main focus though comes with UK Chancellor Osborne who gives his final Budget of this current Parliament. Traders will be looking out for any tax give-aways and also specific policies impacting housing and oil producers.

Chart of the Day – Silver

The silver chart remains in a similar downtrend to the one that we see on gold, although perhaps not as well formed. The downtrend comes in around $15.80 and is being flanked by the falling 21 day moving average which has become a basis of resistance. The momentum indicators on silver also remain firmly in bearish configuration with the RSI mirroring the price decline, whilst the MACD and Stochastics lines also confirm the outlook. One factor that is more positive on silver compared to gold though is that the support around $15.50 has broadly remained intact (this is the equivalent to $1168.25 on gold), with a recent consolidation forming the support around this level. I would say that if silver started to form closing levels below this basis of support then this would signal the continuation of the selling pressure and re-open a move back towards the December low at $14.42. The basis of resistance for the bulls to break through is at the old lows from late February/early March (old support becomes new resistance) within the downtrend just at $16.04 also around the current level of the 21 day moving average.

EUR/USD

The outlook for the euro has settled ahead of what could be a massive fundamental driver event for the pair. The consolidation has continued around the 61.8% Fibonacci projection level at $1.0620 that I have been watching for the past few days. The momentum indicators have been drifting higher recently as this consolidation has continued and I see this more as an unwinding of downside momentum rather than any real signal that suggests that there is any bullish divergence. The intraday hourly chart also reflects the consolidation with the old 9 day downtrend having been broken but the price has been unable to break back above the resistance around $1.0700 with hourly momentum subsequently losing the upside impetus. The likelihood is that the euro will be fairly muted through the day until the Fed announcement this evening. The outcome of that meeting will be crucial to the near term direction of the pair.

GBPUSD

The price action on Cable yesterday reflected a lack of willingness by the sterling bulls to take control and the pressure remains to the downside. There may be some element of consolidation today however in front of this Fed meeting, however the technical outlook remains bearish and suggests a stronger dollar is set fair. The momentum indicators on the daily chart are all set up in negative configuration and suggest further pressure on the recent low at $1.4697, whilst if this level is breached then there is little if any real support until the May 2010 low at $1.4230. The intraday hourly chart shows a consistent run of lower highs and lower lows continues, although the 55 hour moving average which had played a role as a basis of resistance during the recent decline has now been breached and bottomed. This is indicative of the element of consolidation which could develop today. Again as with the euro, the Fed meeting is likely to create significant near term volatility, with the market clearly pricing for a relatively hawkish move by the Fed.

USDJPY

The consolidation on Dollar/Yen set in several days ago and there has become an almost complete lack of willingness to take a view ahead of the FOMC. This means that since the initial attempt at a break above 122 seven days ago the market has just moved sideways. The chart of Dollar/Yen can go through these phases every now and again and we must now wait for a fundamental driver to determine the next near term direction. Although medium/longer term indicators still suggest further gains into multi-year highs, the direction of the near term momentum has been neutralised on both the daily and hourly charts. The hourly chart shows the resistance at 121.67 and the support at 121.07, but in truth until we see a move above 122.02 (the recent multi-year high) or below the 120.60 support there is little direction to be taken from the chart. The FOMC tonight should be able to garner some direction.

Gold

The outlook on gold remains weak with all technical indicators on the daily chart pointing for further downside. Having settled below the $1168.25 old support (which is now a basis of resistance) there should be a continuation of the downtrend channel and a test of the next support at $1142.90 and subsequently the critical multi-year low at $1131.85. It is slow going though, with gold (as so many other dollar driven charts have done in recent days) having broadly settled in front of the FOMC meeting. The hourly chart shows an attempt at a consolidation but with the price continuing to form a bearish drift, leaving a sequence of lower highs and just drifting below support. Again this is likely to be a quiet day up until the FOMC tonight, with gold once again priced for a hawkish lean from the Fed announcement.

WTI Oil

Having thought yesterday afternoon that we could have been on the brink of a near term rebound, the sellers returned once again to push the WTI price back to multi-year lows once more around where we once more find trading levels. The momentum on the daily chart continues to deteriorate and this remains a real concern. However, optimists would suggest that despite two days of intraday breaks to new six year lows, the price has yet to close below $43.58 which was the January 2015 low (which marked the bottom of the huge bear market run). However the prospects of a recovery sill look pretty bleak. The intraday hourly chart shows the minor near term resistance now at $44.20, whilst the interesting near term level is at $44.78 which is a key reaction high within the sell-off. This could be a volatile day (and anything could happen with the FOMC meeting) but the outlook remains bearish for the technicals.