• Central bank meetings this week topped by FOMC on Wednesday

  • EURUSD broadly holds onto gains post-ECB meeting

  • Pair could be set for rangebound period unless FOMC surprises

  • Markets appear to be aggressively dismissing Fed potential to do something

Global Views

The euro more or less held the move to the upside into the close of last week, though if we look back at the December meeting reaction in EURUSD as a model for what may unfold next, we have to remember that the rally of similar magnitude saw very modest follow through higher, followed by two full months of range trading.

Let’s see if this Wednesday’s Federal Open Market Committee meeting can do anything to discourage similar behaviour this time around, though the market is probably correct in assessing a 4% chance of a rate move from the US Federal Reserve this week. That said, I am not sure I understand the aggressiveness of the market’s sceptical stance on the US dollar’s prospects here – this may be the enthusiasm for risky assets and the recent lifting of pressure on emerging-market currencies.

The Bank of Japan meeting tonight has seen expectations for new policy action fading amid the recovery in confidence and easing volatility in JPY crosses. A lack of follow-up measures would theoretically encourage additional JPY buying, particularly on the idea that we continue to see corporate hedging into the Japanese financial year-end at the end of this month.

But a cautionary note for the JPY bulls here — have a glance over at the US currency futures positioning and realise that we are near all-time extremes in long JPY positioning (to be fair, in a number of JPY carry trading regimes, the JPY short positioning was far more aggressive, but it’s hard to argue that we have durable long term JPY bullish factors in play at the moment), so there is little to drive the currency higher from a positioning angle.

The uncertainty in the USDJPY chart remains high as we trade sideways in a rather narrow range.

EURUSD's precedent

Before we’re to draw too many conclusions from last week’s European Central Bank meeting, let’s recall the December experience, when a similar reaction on the ECB meeting day itself yielded to very little additional upside and then a full two months of range trading before there was a continuation move higher.

This time around, support looks like 1.1075/50 tactically and the focus higher is the recent 1.1375 high and then the big 1.1500 area.

Are we set for a rangebound interim?

Global Views

The G-10 rundown

USD – expectations for the Fed this week are minimal despite nearly all the conditions keeping the Fed from hiking again having eased (Chinese yuan policy, oil prices, USD exchange rate, risk appetite). Still, interesting to see whether the Fed changes its guidance (or more interesting still, whether it ditches the embarrassing policy forecasts from its accompanying materials that have been the source of so much derision – not likely, much certainly needed!) and whether the market thumbs its nose at whatever the Fed attempts to communicate. In general, market seems rather aggressively dismissive of the Fed’s potential to surprise this week.

EUR – still in recovery from the trauma of last Thursday – looking for range trading at worst for the euro, with dips to be bought into, even if we’re not at the start of a new uptrend of any note.

JPY – Expectations surrounding tonight’s BoJ meeting rather minimal, not to say that they are finished for the cycle. This could support another round of JPY buying into end of March year-end – but do note the caution on JPY long positioning.

GBP – EURGBP is back to square one after the ECB as the focus has been on GBPUSD instead, perhaps on positioning pain on over-aggressive GBP shorts. For the latter, still prefer to look for bearish developments.

CHF – Speculation this week on whether the Swiss Natioanal Bank responds to the ECB with further rate or other policy moves after having failed to do so at the last few meetings.

AUD – The impressive rally has run all the way north of the 0.7500/50 resistance, but is this getting a bit overdone here short term? Plenty of room for consolidation without threatening the uptrend, though longer term we’re contrarians and look for new AUD bear market for the longer run.

CAD – choppy price action in USDCAD suggests a more two-way market here. The ultimate cycle support looks like 1.2850/1.3000 as we are getting a bit contrarian already at current levels.

NZD – Has stabilised since the Reserve Bank of New Zealand sent the kiwi lower with a rate cut and very dovish guidance. Continue to look to fading any strength, though the technical outlook for NZDUSD has become thoroughly muddled by the recent USD weakness.

SEK – EURSEK did a handy job of reversing the ECB reaction, suggesting ongoing downside risks here, particularly if market mood remains positive. Somewhere below 9.20 we’ll have to wonder where the Riksbank’s pain point is for intervening.

NOK – High odds of a rate cut this week from Norges Bank on Thursday, but reaction potential depends where we are in risk appetite and oil price terms as well.

Upcoming economic calendar highlights (all times GMT)

  • Eurozone Jan. Industrial Production (0900)

  • Canada Feb. Teranet/National Bank Home Price Index (1230)

  • Australia RBA Meeting Minutes (0030)

  • Japan BoJ Policy Statement (no time given)

  • Japan BoJ Governor Kuroda Press Conference (0630)

Global Views

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