Short-term trading opportunities with inflation reports and ZEW Survey today

Price action in the currency markets over the past 24 hours has been smooth which is natural during the first day of the week. We naturally expect more volatility as we move forward given that this is an event-heavy week and the most important event will be the Fed meeting on monetary policy and interest rates on Wednesday. At this point we think it’s important to explain to our audience what we think will happen as we move closer to the Fed meeting and what could possibly take place after it.

We believe that the Fed will raise rates, Janet Yellen has made her case repeatedly and we think that the current progress in the US economy justifies a tighter interest rate policy. However given the recent round of data coming from the US in the past weeks we also think that there is an increased chance that the Fed will pair their decision to raise rates with a more dovish forward guidance.

The performance of the US economy has been good enough this year to allow the Fed to start normalizing their rates’ policy after 9 years. However given the global slowdown, the ECB’s intention to ease further and the dramatic drop in oil prices the US central bank could opt to hint on a more reserved stance after raising rates and that could take its toll on the Dollar.

At the same time, with the US currency bought aggressively across the board and with the end of the year approaching fast we could see a broader correction for the buck after any initial gains. Other than last-minute speculators everyone that wanted to go long on the Dollar ahead of this development has done so and we believe that after the initial surge they might opt to cash out on any gains for the year. Long story short, be cautious as the last 2 weeks of the year might see a Dollar sell-off.

Similar price action for the Euro and the Cable over the past 24 hours, the Single currency remained near its highs even though it corrected slightly during the day while the UK currency did move to the downside testing the 1.5100 support but overnight trading allowed it to regain some of the lost ground. We should expect more price action today as there are important reports pending for release, the inflation levels from the UK early in the morning and the US later in the day and the ZEW Survey in between guarantee price action but we shouldn’t expect too much just a day before the Fed meeting.