Dollar slides after balanced FOMC message

On Wednesday, EUR/USD traded with a slight upward bias in a tight range as markets awaited the outcome of the FOMC meeting. There were again plenty of headlines on Greece, but without direct impact on EUR/USD trading. The FOMC maintained its data dependent stance. The dots suggest a reasonable chance for two rate hikes in the second half of the year. At the same time, the comments from Yellen at the press conference were very balanced. The dollar lost ground across the board after the Fed’s policy announcement. EUR/USD jumped to the 1.1350 area. USD/JPY was well bid in the run‐up the decision, but lost all gains after the FOMC.

This morning, Asian equities mostly record moderate losses after the FOMC decision. Amongst other factors, the softer dollar is a negative for regional equities. USD/JPY is testing the 123 level. EUR/USD holds close to a first technical resistance area (1.1380/86 recent highs). Q1 growth in New‐Zealand was reported at 0.2% Q/Q, well below the market consensus (0.6% Q/Q).
Domestic demand held up reasonably well. Farming and the commodity sector weighed on activity. The report leaves the door open for an additional RBNZ cut if needed. The kiwi dollar rebounded after the Fed decision yesterday evening, but reversed those gains this morning after the publication of the GDP data. NZD/USD currently hovers around the 0.69 big figure.

The final countdown…

Today, there are few eco data in the EMU. In the US, the May CPI, the jobless claims, the Philly Fed index, the leading indicators and the current account are on the agenda. Headline CPI is expected to rise to 0.5% M/M which is already substantial (downside risk?), but core inflation might surprise on the upside. The claims are expected little changed at a low level. For the Philly Fed, a slight improvement is expected. So, the US data look like a mixed bag. Maybe the outcome might be slightly USD supportive, especially after yesterday’s Fedrelated setback. Of course, the headlines on the financial news wires will again be dominated by Greece as the eurogroup (EMU Finance Ministers) meets in Luxembourg. The comments from Greek policy makers of late suggest that chances on an agreement have become very slim.

Over the previous days, trading in EUR/USD and, to a lesser extent, in USD/JPY was paralysed by the Greek debt crisis, but the FOMC triggered a setback of the dollar. EUR/USD is currently close to a first resistance area at 1.1380/86. USD/JPY is sliding below 123. So the dollar is in a soft spot. Today, the focus probably returns to the Greek debt crisis. We see little chance of an agreement. A risk‐off reaction in case of an outright failure might trigger strange moves on all markets, including in EUR/USD. That said, it is difficult to see a new, sustained euro up‐leg in case of a Greek default (or worse). USD/JPY might be ripe for a further correction, especially if global sentiment on risk deteriorates.

In a longer term perspective, EUR/USD trades in the 1.0819 ‐ 1.1386/1.1467 consolidation range A topside break would be a first warning signal for USD bulls. We maintain our cautious sell on up‐ticks approach for return action lower in this range as we don’t see a real change in the global picture, but we are well aware of the risks. The 1.1534 February correction top remains our line in the sand to maintain a USD positive bias MT term. We assume that this level will hold. However, stop‐loss protection is warranted to defend a break, for whatever reason.

Sterling extends gains on higher wages

Yesterday, sterling had a strong run, both against the dollar and the euro. Higher than expected wage rises and a positive BoE assessment in the minutes of the June meeting triggered further sterling buying. EUR/GBP dropped to the mid 0.7150 area and stayed there even as EUR/USD jumped after the FOMC decision. Cable jumped higher after the labour data and succeeded a new upleg as the dollar declined after the FOMC decision. Cable filled bids north of the previous correction top at 1.5815.

Today, the UK retail sales will be published. A limited setback after a strong April figure is expected. We see risk for a bigger monthly decline than the consensus estimate. If so, it might be an excuse for some profit taking on the recent GBP rally. Especially cable might be vulnerable for such a reaction. A Greece driven correction of the euro might keep the topside in EUR/GBP better protected.

Until mid‐May, sterling remained in good shape even as expectations for a BoE rate hike were pushed back to 2016. The UK elections were a sterling positive, too. A correction kicked in at the end of May. EUR/GBP set a rebound top at 0.7386. As EUR/GBP approached a first important resistance (0.7483) we reinstalled a cautious sell‐on‐upticks bias. Recent price action suggests that the downside of the range (0.7055 area) remains well protected too. For now this is a perfect range trading story. The day‐to‐day bias remains EUR/GBP negative.