Post-FOMC dollar strength unwinding slightly as the Scottish polls open

Market Overview

It was clearly an FOMC meeting for everyone. Equities, Treasuries and the dollar all rallied with record highs on Wall Street and major forex pairs such as Euro/Dollar and Dollar/Yen breaking through key levels. The bulls on Wall Street are back in control again, with the S&P 500 creeping above 2000 again and the Dow hitting an intraday record high. Asian markets were fairly mixed, although the Nikkei 225 leapt over a percent as the yen continues to weaken. European markets have opened in mildly positive mood to take account of the gains. However it could be a subdued session as traders await the outcome of the Scottish independence referendum.

The dollar is taking a bit of a pause for breath today as some of yesterday’s gains are being retraced. Despite this though the performance against the yen remains as buoyant as ever. Traders will be watching out for the Swiss National Bank monetary policy at 08:30BST, with the potential for further easing measures and a commitment to the 1.20 floor against the euro. There is also UK Retail Sales at 09:30BST (4.8% YoY in August expected) and the first allotment of the ECB’s LTLRO which is due at 10:15BST. Building permits in the US at 13:30BST are expected to dip by 1.6% to 1.040m, whilst housing starts are expected to dip by 5.0% to 1.038m. Weekly jobless claims are expected to improve by 10k to 305k also at 13:30BST.

It would seem as though the dots matter, or at least that what the market reaction to the Federal Reserve meeting would have you believe. The FOMC has vowed to keep interest rates at record lows for a “considerable time” after the end of its tapering programme (which will end at the next meeting), remaining data dependent, whilst cutting the monthly asset purchases by another $10bn to stand now at $15bn per month. However, the dollar soared once more. The reason was that the aggregate of the dots that the FOMC members place on where they think that interest rates will be in the future, have suggested the speed of tightening has quickened.

Today is also the da that Scotland gets to vote on prospective independence from the UK. The vote remains too close to call, although opinion polls are just leaning slightly towards “No”. However there will be considerable volatility overnight tonight as the results come in between 03:00BST and 06:00BST tomorrow morning. A “No” vote would be expected to create a relief rally on sterling, whilst “Yes” could create mayhem on all UK assets from equities to bonds to currency amid a mass flight away. Whatever the result, volatility will be high.

Chart of the Day – AUD/NZD

Although the longer term outlook is positive for the Aussie following the breakout from the big basing process, the past couple of weeks have seen a sharp correction. However a bullish key one day reversal on Tuesday suggests that the bulls are champing at the bit to regain control again. On a longer term perspective, the recent correction looks to have just been a pullback towards the neckline support of the big base pattern which comes in around 1.1030/50. Although the Aussie has drifted off a touch again if the bulls can hold the low at 1.1017 then the bullish configuration on the momentum indicators (RSI and MACD especially) should begin to have a positive impact on the price. This could prove to be an excellent buying opportunity for the medium/longer term bullish Aussie against the Kiwi. Support comes in at 1.0947 with 1.0922 now key.

EUR/USD

As we have seen previously within this sell-off on the euro, the consolidations are merely brief periods of respite before the downside pressure resumes. This latest move to a new 14 month low may have been induced by the FOMC meeting, but the strength on the dollar remains a key feature in this chart. Technical indicators have turned lower again and there is downside potential for further losses. The next support comes in at $1.2785 which is the 61.8% Fibonacci retracement of the huge $1.2040/$1.3992 bull run, below which is the key support of the July 2013 low around $1.2750. The intraday hourly chart shows a minor bounce overnight from the $1.2833 low, but the old support within the range around $1.2900 is now a basis of resistance and should contain a rally. I am looking to sell into the strength today. There is further intraday resistance at $1.2900 with $1.3000 still the key near term resistance.

GBP/USD

This rebound in Cable may not be especially clean, but it is now beginning to make ground. The key near term feature is the higher low at $1.6260 from Tuesday which has provided a springboard for the upside. Another key factor can be seen on the intraday hourly chart as the support that had been building at $1.6250 was not breached last night despite the strong dollar reaction following the Federal Reserve meeting. The early European session has seen Cable pushing higher once more and the outlook continues to improve. Intraday momentum indicators have taken on a more positive outlook as Cable looks prepared to retest yesterday’s pre-FOMC high at $1.6357. A move above the peak would then open $1.6420 which is the 61.8% Fibonacci retracement of the $1.6644/$1.6050 sell off. The big unknown is the Scottish independence referendum which is taking place today. It is likely that traders might sit on their hands as this pans out, but the way that Cable has reacted post-FOMC, it appears as though some are already gambling on a “No” result, which would provide a sharp relief rally.

USD/JPY

The amazing strengthening on Dollar/Yen has taken off once again as a huge 130 pip rally from yesterday has continued today. The Dollar is now pushing ever closer towards the 110.65 August 2008 high. Momentum indicators remain extremely strong and despite the stretched configuration the bulls are showing no sign of giving up the rally. The only near term way to play this is to run with the bulls, however, in situations like these there is always a risk of a sharp correction, so staying close with stops may be wise. There are initial levels of support at 108.36 but then not until 107.40.

Gold

Yet again the gold price has seen a minor rally sold into and the pressure is to the downside once more. The consolidation lasted only a couple of days this time with gold selling off as the FOMC meeting inspired another dollar rally. This has now strengthened the resistance which has come around the old support of the June low at $1240.60 as a reaction high at $1241.90 has been seen. This has also come just under the resistance of the lower bound of the old downtrend channel. This suggests that the overhead pressure is mounting and that rallies will continue to struggle to make any headway before the sellers return. The initial reaction in as European session has begun has been for a small rebound, but I still expect to see any bounce sold into. The key breach of the $1240 June low opened the next key low from December at $1184.50 and it will take a big effort from the bulls to prevent this being retested now.