The Dollar Rebounds On Fed Stimulus Reduction

Market Brief

The USD was back with a vengeance yesterday as the DXY rocketed to 77.05 from a low of 76.09; triggered by headlines that the Fed would be scaling back some of its emergency lending programs. Prior to the announcement the majors had been lacking much direction, but by the end of the European session equities were lower across the board, EURUSD was testing support at 1.4680, and commodities in particular suffered a crushing day in the face of USD strength. Crude was battered for a second day, this time led by gasoline inventory data which revealed stockpiles grew by ten times as much as consensus forecasts; crude front contract was down 4.5% to end the day at $66. Meanwhile gold plunged from a high around $1018 down to $994 (currently $996), and silver dipped 3.5% to its lowest levels in 2 weeks at $16.25 (still languishing at that level this morning). With USD bears having had the upper hand for much of the last couple of weeks, we believe this sharp move will have stung, and feel that further USD shorts could be shaken out of the market if EUR breaks below 1.4680.

Taking a step back slightly, the morning session had been largely uneventful on the data front, German IFO numbers showed a mild improvement on the month but were lower than forecasts. The biggest move (and notable exception to the directionless trading) was GBP which suffered a massive slide after BoE Governor King was quoted as saying the drop in the pound was “very helpful” in rebalancing the UK economy. GBPUSD tumbled through support levels down to 1.6060 and the rout has continued this morning, touching a low of 1.5920 before take some slight respite and currently trading around 1.5980. EURGBP has capitalized on this plunge by breaking back above 0.9100, and is currently enjoying the heady heights of 0.9180.

The afternoon session was largely directed by the Fed TAF announcement, but a notable data release out of the US was the Existing Home Sales number for August; expectations were for a 2.1% rise but the actual number could only muster a dismal -2.7% (after an increase of 7.2% last month), adding fuel to the fire in terms of USD strength and commodity weakness. Claims data was mixed, with better than expected readings on the week, but with upward revisions to the week prior.

Asian equities have traded heavier today (Nikkei down over 2.5%), playing catch-up from yesterday’s session, but European equity futures are pointing to a marginally higher open. Today’s data calendar sees Eurozone M3 and UK Total Business Investment Data from Europe, while the US session will provide Durable Goods Orders, U.Mich, and New Home Sales. Durable goods Orders are expected to post a 0.4% increase in August, while New Home Sales are forecast to rise 1.6% - considering yesterday’s big miss on Existing Home Sales, will be worth watching this one in case of a further downside surprise that could trigger flight to saftey USD buying.

Currency Tech

AUDUSD
R 2: 0.8943
R 1: 0.8815
CURRENT: 0.8685
S 1: 0.8590
S 2: 0.8530

EURJPY
R 2: 135.50
R 1: 134.50
CURRENT: 133.10
S 1: 132.50
S 2: 132.25

USDMXN
R 2: 13.580
R 1: 13.545
CURRENT: 13.494
S 1: 13.400
S 2: 13.225

• S: Strong, M: Minor, T: Trendline, K: Keylevel, P: Pivot