USD traders in wait-and-see mode ahead of the FOMC

Yesterday, the eco calendar was rather well filled for a Monday. Headlines from Iraq and Ukraine brought geopolitical event risk again in the spotlights, but trading in EUR/USD and USD/JPY was little changed from last week. An early decline in EUR/USD was soon reversed and the pair returned to the mid 1.35 area. Moderate equity losses kept USD/JPY below 102.

This morning, the context for the major currency cross rates remains the same. Asian equities are mixed to slightly lower. This time, Japan is outperforming, while China is underperforming. Disappointing Chinese FDI data are blamed for the latter. USD/JPY is back near the 102 pivot. EUR/USD touched a minor ‘correction high’ in the 1.3585 area this morning, but the pair already returned to the mid 1.35 area. The Aussie dollar cedes quite some ground this morning as the minutes from the RBA meeting are more dovish than expected, pushing rate hike expectations further out in time. Later today, the German ZEW investor confidence will be published. A small rise is expected, but we see a downside risk. However, we don’t expect the ZEW to have a profound impact. In the US, the CPI, the Housing starts and the housing permits will be published. The CPI is expected unchanged at 2.0% Y/Y and we side with consensus. Even so, an upside surprise might cause some nervousness ahead of the FOMC decision and support the dollar. The housing starts and the building permits are expected lower on a monthly basis after last month’s sharp rebound. Maybe, the monthly decline could be slightly bigger than anticipated. So, overall today’s data won’t be a game changer for the dollar. Currency traders will also look forward to the FOMC meeting and Yellen’s press conference tomorrow. Recent price action suggests that both the interest rate markets and the currency marker are positioned for the Fed to maintain a rather soft bias. Will markets shift to a (slightly) more neutral position ahead of the Fed policy announcement? It might, but it won’t push the dollar above important resistance (USD/JPY 102.80 or EUR/USD 1.3503). Geopolitical tensions remain a wildcard, but of late they had little lasting impact. At the margin, the cautious sentiment on risk looks like hurting the dollar slightly more than the euro.

To conclude: the context is not really supportive for the dollar, but neither for the euro. The recent high in EUR/USD was tested this morning, but the test was rejected. The 1.3503/1.3477 area is still the first key reference on the downside in EUR/USD. A cautious sell-on-upticks approach is still favoured. The picture in USD/JPY remains fragile too, but we don’t go short USD/JPY ahead of the FOMC decision.

Yesterday, EUR/JPY tested the 137.75 support, but the test was rejected. This move probably helped to give some downside protection to EUR/USD and to USD/JPY.

Sterling rally shifts into a lower gear

Yesterday morning, cable spiked temporary above the 1.70 barrier. Headlines of BoE’s Bean ‘subscribing’ the case of a potential rate hike might have played a role. EUR/GBP touched a new correction low in the 0.7960 area. However, after the recent rally and with no big news from the UK, the rally of sterling finally ran into resistance. The correction is very limited, but suggests that the sterling rally is ripe for some consolidation, especially if the UK data would become less buoyant.

This morning, there are some headlines from BoE’s Milles, who indicates a change in the mind-set of the BoE on rates. He also suggests that he will vote for a rate hike before his term ends in May next year. He also downplays the impact of the currency on exports. All this is another indication that the BoE is moving closer to an interest rate hike. The comments caused no additional sterling gains. Later today, the focus will be on the UK price data (PPI and CPI). The headline CPI is expected to decline from 1.8% to 1.7%. UK activity data surprised mostly on the upside of late. A slight upward surprise in the CPI is not excluded. However, a figure below 2% probably won’t inspired further sterling gains after the recent rally. So, some consolidation both in cable and EUR/GBOP might be on the card. However, we don’t expect a big setback as markets will wait for the BoE assessment in the minutes that will be published tomorrow. The BoE may shift to a less dovish stance, according to Miles.

Sterling had a very strong run of late and at some point consolidation will kick in. Even so, we don’t row against the tide. We have a long-standing EUR/GBP negative bias and keep this in place. The 0.7755 2012 low is the next high profile target on the cards. With a little help from euro weakness, this target might come within reach sooner than expected until now. Cable is testing the 1.70 level. The picture in this cross rate has improved, too and a sustained break is well possible especially as the dollar isn’t really in good shape. In a longer term perspective, we are more neutral on the upside potential for cable.