Daily Report: Will the Fed conclude QE?

Although the majority of headlines throughout yesterday concentrated on the Chinese GDP figure of 7.3% being slightly higher than the 7.2% forecasted, the Eurodollar declined by nearly 100 pips following rumours that the European Central Bank (ECB) is considering expanding its current asset purchasing program to begin acquiring corporate bonds during 2015. While ECB officials have since denied the rumour, investors have continued to price in future stimulus from the ECB.

Although the EU economic sentiment remains bleak and repeated warnings over stagnant economic growth and the possibility of Germany entering a recession certainly point to longer term downside risks for the Eurodollar, which direction the pair fluctuates in the nearer term is far more dependent on demand for the USD. This afternoon’s highly anticipated US economic data where the latest US inflation figures will be announced will be important for Eurodollar. The current expectation is for CPI to see an annualised 1.6% increase, but the recent FOMC Minutes indicated concern was emerging among the Fed that the substantially higher-valued USD over recent months would lead to an unexpected decline in US inflation.

Not only has concern emerged from the FOMC that there is a danger of US inflation levels declining but James Bullard, known as being the Federal Reserve’s most hawkish representative, has surprised by suggesting that if CPI targets become unattainable the Fed should consider delaying the conclusion of QE this month and continue the program. Although Janet Yellen confirmed in September that QE would conclude last month, Bullard’s comments suggests there remains a chance of the program continuing if there is an unexpected downturn in CPI – meaning this afternoon’s US inflation data is going to be closely watched by investors around the world.

If the US CPI for September follows the same paths as the unexpected decline reported by both China and the UK, investors are going to become very unnerved by the possibility that QE could continue next week after all. Not only would this weaken demand for the Dollar, but expectations for any upcoming US interest rate rises from the Federal Reserve would be removed from discussions for quite some time. I expect this would lead to many positions being closed and lots of taking profit on the USD commencing. Unless the US inflation data suggests that the Fed’s 2% inflation target is attainable and all but confirms that QE will be concluded next week, we can’t rule out the possibility of the Eurodollar regaining Tuesday’s losses.

Should the inflation data disappoint and subsequently raise speculation that the Federal Reserve will not conclude QE, pullbacks are likely in all the USD led major currency pairs. USDJPY support is located at 106.610 and 106.140, while potential USDCAD support can be found at 1.1177 and 1.1101.

The Eurodollar regaining losses would also lead to a pullback in the USDCHF where support can also be found at 0.9448 and 0.9391. In line with expectations, Gold has continued to appreciate since hitting the psychological $1180 support level earlier in the month, but the pair has struggled to surpass resistance located at $1255.

The Federal Reserve pausing its current plans to normalize monetary policy would lead to further fears over the global economic recovery. This should provide Gold with enough momentum to surpass resistance at $1255, where further resistance can be found at $1270.