Fed ready to raise rates, Draghi to deliver more QE

Forex News and Events

The Fed has never been that close to raising rates (by Peter Rosenstreich)

Fed Chair Janet Yellen reinforced the market thinking that December 16th would see the first interest rate hike in nine years. In an expressively hawkish speech on “The Economic Outlook and Monetary Policy”, Yellen pointed to the cumulative progress that has been made towards the Fed dual mandate. She highlighted the strong domestic economy in the decline of unemployment to 5.0% and “solid” household spending growth. She expects that further improvements in the labor market will be translated into inflation towards the Fed 2.0% target. There were notes of dovishness within the speech as Yellen clearly mentioned the drag on trade from the strong USD. Finally, she indicated that monetary easing from developed and emerging market central banks and fiscal stimulus from these governments would reduce the downside risk from subdued global growth. Fed Chair Yellen will testify to the Joint Economic Committee of Congress today but it’s unlikely we will get new information regarding December tighten given the quality of recent Fed speeches. Yellen provided clear guidance that the path of rate hikes would be gradual; however policy path would ultimately be data dependent. Data reading will start this afternoon with ISM manufacturing, factory orders and durable goods. The concept of data dependence will also increase the stakes for Friday payrolls. Yesterday’s elevated ADP read (217k vs. 190 exp) has skewed expectation to the upside. Bloomberg estimates currently stand at 190k however; the street’s call is closer to 200k. With rate pricing in a shallow Fed policy path, should the data show meaningful acceleration, the curve will steadily steepen. With the ECB expected to deliver aggressive easing measures today, participants will continue to exploit policy divergence strategies in the FX markets. The long USD trade is crowded yet we expect yield spreads to widen further sparking additional demand for the greenback.

Draghi set to increase duration of the QE (by Yann Quelenn)

After a very quiet today yesterday, we expect some volatility today with the ECB meeting. There are important expectations about by how far ECB President Mario Draghi will expand the Quantitative easing. Indeed, the inflation target has been said to be the primary objective of the central bank and Draghi has already mentioned that he will do whatever it takes to boost Eurozone inflation which is necessary to pursue growth.

Over the past few weeks, ECB’s officials has not to make declarations that send signals which lowered the EUR. The single currency now establishes at a seven-month low versus the greenback on high expectations about the expansion of the ECB quantitative easing. We think that markets under-price the likelihood of a strong increase of the QE duration. A six-month increase seems until March 2017 does not represent for us the best issue. The past has shown, in the U.S. and in Japan that assessing a QE efficiency is not a matter of months but rather of year. In the same time Mario Draghi cannot announce that the quantitative easing would last forever as its monetary policy credibility to would be questioned. As a result, we firmly believe that the duration will be increased officially to September 2017.

In addition, the rates decision will be released early this afternoon. We expect the deposit facility, which banks may use to make overnight deposits, to be lowered to -0.3%. At last, the EURUSD is set to weaken below 1.0500.

EUR/CHF - Lack Of Follow-Through

The Risk Today

Yann Quelenn

EUR/USD has declined below 1.0600 and remains in a downtrend channel. The technical structure is still clearly negative. Hourly support lies at 1.0566 (intraday low). Hourly resistance can be found at 1.0763 (19/11/2015 high). Stronger resistance stands at 1.0897 (05/11/2015 high). Expected to show further decline. In the longer term, the technical structure favours a bearish bias as long as resistance holds. Key resistance is located region at 1.1453 (range high) and 1.1640 (11/11/2005 low) is likely to cap any price appreciation. The current technical deteriorations favours a gradual decline towards the support at 1.0504 (21/03/2003 low).

GBP/USD's downside momentum remain lively. The pair has broken the lower bound implied by the declining channel. Hourly resistance is given at 1.5336 (19/11/2015 high). Strong resistance can be found at 1.5529 (22/09/2015 high). Expected to consolidate. The long-term technical pattern is negative and favours a further decline towards the key support at 1.5089 , as long as prices remain below the resistance at 1.5340/64 (04/11/2015 low see also the 200 day moving average). However, the general oversold conditions and the recent pick-up in buying interest pave the way for a rebound.

USD/JPY is now rising towards 123.76 (18/11/2015 high). Support is located at 122.23 (16/11/2015 low). Expected to bounce back to the support at 122.23. A long-term bullish bias is favored as long as the strong support at 115.57 (16/12/2014 low) holds. A gradual rise towards the major resistance at 135.15 (01/02/2002 high) is favored. A key support can be found at 116.18 (24/08/2015 low).

USD/CHF is now consolidating. Yet the pair is still trading around its five-year high. Hourly support is given at 1.0122 (19/11/2015 low) while hourly resistance is given at 1.0328 (27/11/2015 high). Expected monitoring of the support at 1.0122 as a trend reversal may gain some traction. In the long-term, the pair has broken resistance at 0.9448 and key resistance at 0.9957 suggesting further uptrend. Key support can be found 0.8986 (30/01/2015 low). As long as these levels hold, a long term bullish bias is favoured.

Resistance and Support: