Daily Forex Outlook: What you need to know for Thursday

It was all about the US Dollar on Wednesday, as the FOMC telegraphed, and the market agreed to buy into, that another rate hike is likely in December,. The FOMC committe also stuck to its initial plan to begin a reduction of its inflated balance sheet, an outcome fully priced in by the market. The most telling barometer of the ebullient mood towards the US Dollar was the spike in the Fed funds rate, now pricing a rate hike chance of nearly 70% in Dec vs 46% pre-FOMC. 

As I read some of the bank reports hitting my inbox a while back, one that caught my attention was by ING, stating that "with the Fed's preferred core PCE measure of inflation having fallen off a cliff in recent months, it wouldn't have been that surprising to see some voters scaling back their expectations for rate hikes in the latest dot diagram." Indeed, the lack of concern by what the committe may probably still see as a temporary dip in inflation (despite Yellen had a hard time explaining such supressed levels) reinforces the notion of today's hawkish outcome. 

As ING explains: "This lack of movement in the dots signals that the committee is still fairly comfortable that the recent dip in inflation is largely a blip. The Fed has often said it believes much of the weakness to be down to temporary factors, and we also expect the pickup in fuel prices and fall in the US dollar to give inflation renewed impetus into the end of this year."

The US Dollar not only saw an immediate bullish reaction to the 18GMT statement, in which rate hike projection turned more hawkish, but it also found subsequent follow through as the market adjusted the US Dollar valuation of what had been a fairly cheap currency heading into the FOMC.  The fact that the Fed anticipates an additional four hikes through 2018 vs 1 ½ priced, justified the extra legs seen in the USD, which now needs an improving yield curve to keep the momentum going. During Yellen's press conference, there was little substance in her comments; if anything, the absence of signficant headlines helped to clear risks and allowed further USD uplegas as today's upside inertia was clear from the get go post FOMC statement at 18 GMT. 

Today's positioning in the USD, serves as a good lesson, as it was a clear example of a common practice aka 'manipulation' by smart money, by which a currency is initially taken lower in the opposite desired direction ahead of a risk event, only to reverse once the injection of volatility makes its way through, as big boys aim for the most 'bang for their buck'. The strategy certainly worked wonders based on today's price action. 

As the NY session came to an end, the Greenback held onto its strong gains vs the EUR, a signal that long-sided business remains comfortable holding positions for what may possibly be further gains. EUR/USD printed a sizeable bearish outside bar, closing a few pips below 1.19, a technical formation which may hint at further downside pressure in days ahead. On Thursday, ECB’s Praet will be chairing the policy panel at the ECB conf. in Frankfurt, while ECB Draghi will provide welcome remarks at the 2nd ESRB annual conf. in Frankfurt too. 

Unlike the Euro, the Pound saw its losses vs the US Dollar limited by the lower edge of its week-long range circa 1.3460/70/. While the pin bar on the daily represents a strong rejection, the limited drop post FOMC is evidence of a market keen to bid GBP in anticipation of a possible BoE rate hike in October/November. The strong upbeat reading in today's UK retail sales is yet another indication that rate hikes in the UK may be coming sooner rather than later. 

The Australian Dollar performed in a similar fashion as the Pound, being rejected strongly off highs by th moe hawkish FOMC outcome, although still managing to end the day in positive territory above 0.80c. As a reminder, Tuesday's RBA minutes maintained the status quo of a balanced but cautious Central Bank in Australia. For those trading the Aussie, RBA Governor Lowe is due to speak in the next Asian session, so watch for any market moving headline. 

USD/JPY bulls had no mercy as the price skyrocketed to test for the first time July 26th the 200-day MA. The pair has seen its valuation much higher in the last 2 weeks as US rates, stocks and overall risk appetite keep underpinning the buy-side action. The next risk event for the pair is due in the next Asian session, with the release of the BOJ policy statement. The Bank of Japan (BoJ) is widely expected to maintain its policy stance unchanged. As usual, keep an eye on North Korea.

Against the Canadian Dollar, the US Dollar did better than vs GBP, AUD, ending over 25/30 pips up for the day at 1.2320; although the technical picture remains quite bearish on the daily, the hourly is starting to build a bullish structure that now requires the clearing of 1.24 handle to solidify an improvement in technicals in hgher timeframes. Higher oil prices, despite bigger than f/c EIA build, and the tightening bias by the BoC, saw plenty of offers protecting the 1.24 handle post FOMC.

Gold was hammered to re-test the $1,300.00 level, while the S&P 500, surprisingly, erased all its losses post FOMC, to end the day at 2,507.00, printing a continuation bullish pin bar which reflects a market still in the mood to keep making fresh record highs. US stocks were mainly supported by the bank sector.