Forex - Time To Reflect On USD Direction From Here

Forex News and Events:

With the excitement of yesterday’s central bank events out the way, the markets are now mulling over what the USD strategy should be from here. The initial sell-off after the release of the FOMC statement failed to gather enough momentum to break through the key support levels, and the DXY bounced sharply afterwards to end up higher on the day around 76.40 (having touched a low of 75.82 after the statement). Strangely, despite reassurances from 3 different central banks yesterday that their assessment is one of an improved global outlook, equity markets across Europe are very heavy this morning, USDJPY is down nearly 1% at 90.40, and oil continues to suffer after yesterday’s plunge; in fact it feels a lot like the markets are gearing up for a wave of risk aversion. The fact that the Fed have now timetabled an intended exit from QE should provide some respite for the downbeaten USD, but there’s still that overarching feeling that USD weakness is likely to be a prolonged theme going forwards and that this may just represent the long overdue correction we’ve been waiting for. Aside from USDJPY, the main mover this morning has been GBP; after a dazzling run yesterday that was doused only by the USD’s widespread recovery, BoE Governor King managed to kick the currency while it was down by stating in the Newcastle Journal that the pound’s drop would be helpful for rebalancing the UK, and that furthermore the UK banking sector is not in good shape. GBPUSD plunged towards 1.6200, and with EURUSD largely unchanged on the day, EURGBP ramped up to just above 0.9100 – its highest levels since April this year. After the hawkish Norges Bank statement yesterday that discussed the possibility of a hike this month, and other economies such as NZD already out of recession in Q2, GBP seems extremely vulnerable to longer term weakness as we expect the driver of FX markets to gradually shift to reflect diverging paths of monetary policy going forward. Notably today is the start of the G20 summit in Pittsburgh, and according to a document leaked to Reuters this week, the main agenda item is rumoured to be discussion of a plan of “mutual assessment” than ensures “policies pursued by individual G20 countries are collectively consistent with more sustainable and balanced trajectories for the global economy”. However, this would seem a particularly tricky plan to negotiate given the differing situations and rates of recovery for individual countries. It won’t be the first time that concern has been raised about the G20 proposing a coordinated stimulus withdrawal that might be perceived as premature. Nevertheless, policy makers have been careful in previous meetings to avoid potentially inflammatory statements that focus on specifics or timelines, and we feel it’s likely they will continue instead to emphasize the importance of working together on a sustainable recovery plan. There is also certain to be discussion on bankers’ compensation and incentives, but nothing likely to rattle the markets.

Today's Key Issues (time in GMT):

00:00 SEK G20 Finance Ministers meet (to 25 September)
00:00 EUR FRB of Chicago President Evans speaks on asset price exuberance and macro prudential regulation
00:00 EUR Republic: CNB interest rate announcement, % Sep 1.25
07:15 EUR Manufacturing confidence, index Sep -18 exp
08:00 GBP Germany: IFO business climate, index Sep 92.0 exp
08:00 USD Germany: IFO current assessment, index Sep 88.0 exp
08:00 USD Germany: IFO business expectations, index Sep 96.5 exp
12:15 MXN BoE MPC member Spencer Dale speaks in Exeter
12:30 Initial jobless claims, thous (4wk ma) 19-Sep 545 (563) exp
14:00 USD Existing home sales, mn Aug 5.33 exp
14:00 EUR Bi-weekly CPI, % 2w/2w H1 Sep 0.39 exp
14:30 JPY Israel: BoI interest rate announcement, % Sep 0.75 exp
14:45 Chicago Fed President Evan (FOMC voter) gives opening remarks at the Chicago Fed banking conference
17:00 ECB Executive Board member Stark speaks
23:50 BoJ minutes of August 10-11 MPC published

The Risk Today:

EurUsd The short term battle between 1.4684 and 1.4876 has been making things a little messy on the intraday picture, especially with the Fed meeting last night. However, a look at the 4 hour chart and one can see clearly that the RSI divergence play has continued to trade like a dream as it trends lower in perfect order. Those brave enough to follow this theme by shorting last night are sitting pretty this morning with a full figure on the P&L. 1.4684 has given the pair support overnight so the range bound action all around this resistance zone is likely to remain choppy as the battle between bullas and bears continues. The RSI reading here will remain key. Watch for a break below 40 on the 4 hour chart to confirm impending weakness and an incereased chance of the pair to break lower. To the upside, be vigilant for a break of the RSI downtrend which could trigger stops for the big divergence players. A move higher in the price back to the major resistance at 1.4850 / 75 with an RSI continuing downwards will simply provide the shorts with yet another opportunity to add to their position. The stops above that level must be getting rather large to say the least.

GbpUsd We said on Tuesday that any move to 1.6435 would provide a great short entry and we have been fortunate enough to see the pair reach that level before contiuning its move through the head and shoulders formation, dropping this morning to sub 1.6200. The neckline of the internal shoulders sits at 1.6078 and a break there will likely send the pair spiralling to the major neckline at 1.5947. The scary thing for UK importers is that this move so far has been all about GBP weakness rather than USD strength. Add a small dose of deflation talk to this market and the pain will intensify. Updates on this picture throughout the day upon request.

UsdJpy We said on Tuesday that 92.50 would likely cap the pair despite it being outside of the 6 week downtrend and after one touch of the level the pair has resumed its downtrend to retetst the lows at 90.20. The picture does not look great for the bulls as the 4 hourly RSI has more room to go before becoming oversold. Expect 90.20 to provide some intraday bounces as some short covering occurs but ultimately there is a strong chance that the level breaks. For those searching a short entry point, the downtrend now comes in at 91.20 and 91.70 / 80 is the first significant resistance. A break below 90.20 targets 89.71 and 88.60 thereafter.

UsdChf "The trend is your friend......until its about to end" .....never has it been so true as with USD CHF for the last month but one should always remember the second half of the sentence. Complete mirror image of the EUR USD on a 4 hour chart with positive divergence for the last couple of days. The pair printed a low last night of 1.0186 which is close enough to the target of 1.0150 and after a 6 figure run on the pair, expect large shorts to be scaling back. There may be another flush out in USD but with the Fed's worryingly continual usage of the phrase "muted inflation" (which to me is their way of preparing people for deflation) then risk reward against further USD weakness is diminishing. Intraday shorts can again be expected at 1.0300/30 but will they have enough firepower to battle with some potential mass short covering? Probably not.

Resistance and Support: