Forex - Fed Shows Signs Of Moving Away From Loose Monetary Policy

Forex News and Events:

Yesterday’s FOMC statement provided an unexpected split vote that suggests the Fed may be starting to lean away from continued loose monetary policy. Although the committee members kept interest rates unchanged and preserved most of the wording from the last statement, Fed member Hoenig dissented in the vote; as he believed “that economic and financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted”. This 9-1 outcome represents the first non-unanimous vote since January 2009, and is an important development in the Fed path to normalization of monetary policy. USDJPY rallied strongly on the news as the appeal of the JPY’s safe-haven status dimmed against the prospect of US rate hikes. There was a further rally in USDJPY after Obama’s State of the Union address which focused predominantly on job creation and healthcare reform; neutralizing some of the risk premium priced into the market that he might discuss further banking reform. Nevertheless, the considerable weight of ongoing sovereign debt concerns, fears that Chinese monetary tightening may scupper the global recovery, and subdued data releases are prevented a broad-based JPY sell-off. The data this morning has so far, failed to inspire any new trends; the unemployment rate in Germany rose to 8.2% from 8.1% last month but this was exactly in line with expectations, German CPI (EU harmonized) was much lower than expected at -0.7% MoM against expectations for -0.4%, but Eurozone economic sentiment came out at a much stronger 95.7 print (92.4 expected) and there was an upward revision to last month’s reading (from 91.3 to 94.1).

Today's Key Issues (time in GMT):

13:30 USD Durable goods orders, % m/m Dec exp: 2.0 prev: -0.2
13:30 USD Initial jobless claims, thous 23-Jan exp: 450 prev: 482
13:30 USD Continuing claims, thous 26-Jan exp: 4600 prev: 4599

The Risk Today:

EurUsd Wave 5 of 5 of an intermediate wave 1 now looks complete and while there is the risk that the pair hugs the lower trend line to lower prices, there is every conceivable type of divergence as well as a series of candlesticks that are frequently seen at bottoms. At this point, not only would I make sure all short profits are off the table, I would also be tempted into the long side despite my bearish macro outlook for the medium term. There are still a number of USD bears out there and a 50% intermediate wave 2 retracement to 1.4540 region would not surprise me in the slightest. However, it will be very important to monitor any longs with great care as the retracement may fall short as early as 1.4216 and begin the intermediate wave 3 to 1.2900 at any stage.

GbpUsd Last week we said that we needed to break the uptrend at 1.6078 to continue the downtrend but with some over excitement about +0.1% GDP the pair has found good bids all around that level. That said, the pair has also seen good supply at 1.6272 but the pair looks set to break that level at time of writing and potentially set us up with a shorting opportunity up at 1.6350 (maybe just after the 1.6280 short stops get triggered)

UsdJpy Patience is wearing a little thin with this wave 4 as the pair constantly drips sideways and slightly down, toying with the 89.30 support in the process with 89.36 standing as a 50% retracement of the first 3 waves. On that note we have to consider the possibility that we are in a wave 2 but that’s the good thing about Elliot Wave – it is a game of working otu your probabilities of the next direction and whether we are approaching the end of wave 4 or the end of wave 2, we should still be taking out a new high above 93.88 in the near future.

UsdChf Last week we said we could look to get long in the 1.0360 region before heading towards a wave 5 new high of 1.0556. After touching a low of 1.0368 on Monday morning the pair has trundled higher all week. Overnight in the Asian session we finally saw the pair hit the target (1.05555) before printing a number of candles frequently seen at tops. Coupled with the heavy divergences between price and momentum indicators and we can safely start looking at the idea of shorts with stops above the highs. Stops up here above the high are absolutely essential for me because if we have the wave count wrong or there is an extended wave 5 to come at us, then we will be looking at a move a few big figures higher. For now though, the risk reward favours a short term short back to 1.0390

Resistance and Support: