Counting down to the Fed policy statement

Yesterday, currency traders counted down to today’s FOMC decision. The US data (durable orders and consumer confidence) were below consensus but had only a very limited and temporary impact on USD trading. USD/JPY drifted lower in the 120 big figure and closed the session at 120.46 (from 121.1 on Monday). EUR/USD stayed within reach of the post-ECB low. The pair ended the session at 1.1051, little changed from the 1.1058 close the previous day.

Overnight, most Asian equity indices are trading in the red with China underperforming (losses of about 1%). Japan outperforms. Even so, USD/JPY (currently around 120.40) and EUR/USD (1.1035 area) are little changed from yesterday’s closing levels. The Australian Q3 CPI was reported at 0.5% Q/Q and 1.5% Y/Y, well below the market consensus (1.7%). Core inflation was also lower than expected. AUD/USD dropped from the 0.7200 area to the 0.7120 area as markers see rising chances for an additional RBA rate cut.

Today, there are only second tier eco data in Europe. We keep an eye at the Riksbank policy decision and the monetary policy report. The Riksbank is one of the protagonists in implementing an extremely easy monetary policy to fight low inflation, even as economic growth remains at a fairly decent level. Only a small minority of analysts expect further easing. However, given the recent soft ECB stance, the Riksbank decision deserves monitoring. In the US, the September trade balance will be published. Of late, US trade data showed a rising deficit. This might weigh on the US Q3 GDP (via the contribution of net exports). For September a limited improvement in the deficit is expected from USD 66.6 bln to 64.3 bln. Another negative surprise might fuel the debate on the valuation of the US dollar. However, any impact on the dollar (or other markets) will be limited ahead of the FOMC decision. The Fed is expected to leave its policy unchanged. In the statement, it will probably acknowledge recent soft US (labour market) data. The question is whether the Fed will give any hints that a December rate hike is becoming less likely. The fed will not pre-commit, but markets might see a ‘softer’ statement as the Fed is walking away from a December rate hike.

So, in a day-to-day perspective, markets will probably be in wait-and-see modus ahead of the Fed policy decision. A softer tone in the Fed communiqué might be a slightly negative for the dollar. However, the topside in EUR/USD will probably remain capped by recent very aggres sive ECB talk (cfr. Praet and Coeure yesterday). USD/JPY might be a bit more vulnerable as a further BOJ easing later this week is far from a done thing.

In a longer term perspective, global markets recently focused on the impact of weaker US data on the Fed rate hike path. That made the dollar vulnerable. Last week, markets were positioned for soft ECB speak, but at the press conference, ECB Draghi went much further towards additional easing than markets anticipated. The topside in EUR/USD (1.1460/95 resistance) was extensively tested, but the test was rejected, making it better protected. The ECB is preparing markets for a new round of monetary easing which pushed EUR/USD below the key 1.1087/1.1105 support. If confirmed, this break paints a multiple top formation on the charts. The targets of this formation are in the low 1.07 area.

Q3 UK GDP weighs slightly on sterling

Yesterday, UK Q3 growth was reported at 0.5% Q.Q and 2.3% Y/Y, slightly below the market consensus (0.6% Q/Q). Manufacturing activity and construction were unexpectedly weak. Services remained the key driver for UK growth (0.7%). Sterling lost moderately against the euro and the dollar after the publication of the report. Later in the session, global factors prevailed again for sterling trading. EUR/GBP closed the session at 0.7221 (from 0.7203). Cable ended the session at 1.5300 (from 1.5352). So, the weaker than expected Q3 GDP triggered some modest losses on a daily basis.

Today, there are no important eco data. We expect a rather calmer trading session for sterling trading as global markets are in wait-and-see modus going into the Fed policy decision. Soft ECB comment might continue to cap the topside in EUR/GBP.

Looking at the broader picture, the soft tone at the ECB press conference pushed EUR/GBP back lower in the longstanding sideways range. The pair dropped temporarily below the 0.7196 support and the test of this level is ongoing. Euro weakness currently prevails, but EUR/GBP looks a bit oversold short-term. We look to sell EUR/GBP on upticks.

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