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Forex: Dollar Posts Biggest Rally in 6 Months after FOMC

By , Chief Currency Strategist
20 March 2014 04:32 GMT

Talking Points:

  • Dollar Posts Biggest Rally in 6 Months after FOMC
  • British Pound Gets the Go Ahead to Advance from BoE
  • Euro’s Period of Quiet May be Running Out

Dollar Posts Biggest Rally in 6 Months after FOMC

The Dow Jones FXCM Dollar Index (ticker = USDollar) – facing the close of a tight trading range – found an explosive breakout on the back of the FOMC rate decision. A breakout was a practical necessity, but the severity of the dollar’s rally reflects upon a fundamental event that can engage the currency and broader capital markets moving forward. For USDollar, the news of the third $10 billion Taper and traders’ interpretation of a more timely return to a rate hike regime for the Fed translated into the index’s biggest single-day rally in six months.

For the majors (USD-based pairings), the gains were universal; but the technical moves were more significant where the monetary policy differences were starkest. With the Aussie dollar still stuck with a dovish label and the BoC Governor warning rate cuts were still an option this week, both AUDUSD and USDCAD dove 0.9 percent. Yet, some of the more dramatic moves came where the monetary policy competition was more substantial. EURUSD – levitated by the ECB’s balance sheet reduction – reversed from a multi-year high that was locked on 1.4000.

Measuring the greenback’s performance versus its counterparts and taking note of the limited ‘risk’ response from the Fed event (via equities, yen crosses, emerging markets and other benchmarks), we can ascertain the market’s assessment. The third consecutive $10 billion Taper (bringing monthly purchases to $55 billion) was expected, and the statement’s note of “sufficient underlying strength” for the economy maintains expectations of a QE3 close by September or December.

In the early stages of the yield and carry return, the FX market will favor early adopters that are backed by liquidity and growth. That is where the Pound and Euro have found much of their strength over the past months. Yet, the Fed has recalibrated the market’s estimation for the US with this FOMC meet. In addition to forecasts for economic benchmarks, the central bank has also updated its rate outlook. The median forecast amongst officials now sees the benchmark rate at 1.00 percent by the end of 2015 (previously 0.75) and 2.25 percent in December 2016 (previously 1.75). Much was also made out of Chairwoman Janet Yellen’s response in the Q&A that a ‘considerable’ time for the Fed to wait after the end of the QE program – mentioned in the statement – may be 6 months. Fed Fund futures are pricing a June 2015 first hike.

British Pound Gets the Go Ahead to Advance from BoE

Though the FOMC decision has received the bulk of the global FX headlines this past session, the UK’s docket was brimming with event risk. The most definiterelease was the February labour data. The 34,600-filing drop in jobless claims was larger than expected and the January ILO jobless rate held at 7.2 percent – just above the 7.0 percent target the central bank initial laid out in its forward guidance. This adds a little buoyancy to rate expectations which have been buoyed since BoE Governor Carney took the reins last summer, but it doesn’t move forward the timeline like the Fed did. Far more interesting was the BoE minutes. The group noted that the recovery was not balanced and that inflation was curbed by the sterling’s strength. These are the same concerns that the ECB noted at its last meeting, but the threat of a policy move due to the pound didn’t take. The transcript also said explicitly that there was risk of further pound gains as the economy recovered.

Euro’s Period of Quiet May be Running Out

The Euro does well in quiet market conditions. If global capital markets avoid volatility and European headlines don’t trumpet the return of a regional crisis hotspot, the ECB’s balance sheet will steadily decrease and market rates will rise. That has proven a considerable boon for the shared currency, and both sovereigns and corporate members have taken advantage. Bailout recipients have returned to the market, reserve capital is returning and investors are still trying to draw out yield. Yet, all of these benefactors are at risk should volatility return.

Japanese Yen Crosses Defy Equities, Did Kuroda Issue a Warning?

While the Nikkei 225 has followed in the S&P 500’s footsteps this morning, the yen crosses are generally higher over the past 24 hours. The shift forward in the Fed’s return to rate hikes doesn’t seem to carry as much prominence for ‘risk’ trends. Meanwhile, traders should take note of BoJ Kuroda commentary this past session whereby he said much of the yen’s excesses were reduced last year. Is that growing reticent to boost QE?

Swiss Franc: SNB Has to Consider ECB Moves in Policy Meeting

The Swiss National Bank (SNB) is set to deliberate on monetary policy this morning. While I have typically written off this event over the past few quarters, there storm clouds building on the horizon that the central bank may need to account for. In particular, EURCHF has begun a retreat towards 1.2000 once again – despite the euro strength – and there are real expectations of further easing from the ECB.

New Zealand Dollar Slips Despite In-Line 4Q GDP Report

Growth in New Zealand cooled through the fourth quarter, but the 0.9 percent expansion was still robust and in-line with economists’ consensus. Yet, it seems that meeting expectations wasn’t what the market was looking for. NZDUSD dropped 30 pips after the data crossed the wires and the kiwi is down across the board this morning. According to swaps, there is still a 94 percent chance of an RBNZ follow up hike next month.

Emerging Markets: Fed’s Withdrawal of Easy Money Weighs Where Crimea Hasn’t

Some of the loudest protestations against the Fed’s downshift in its QE3 program have come from the Emerging Markets. The region has benefit from the global growth and heavy foreign investment founded on the cheap funding of central banks like the FOMC. With the third Taper this past session, the MSCI Emerging Market ETF dropped 2 percent on heavy volume.

Gold: A Fourth Consecutive Drop Would Snuff the 2014 Bull Trend

A Taper is yet another downshift in the flood of liquidity that has watered down the general appeal of ‘fiat’ assets around the world. As a favorite alternative to ‘currency’ and the dollar in particular during the heights of the stimulus ramp, the precious metal didn’t take too well to the FOMC. Gold has now put in for only its second three-day decline of 2014. Another decline and this can more seriously change our trend.**Bring the economic calendar to your charts with the DailyFX News App.

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

7:00

CHF

Trade Balance (FEB)

--

2.59B

Volatility may be limited as markets await the Swiss National Bank 3M LIBOR target and Jordan’s comments.

7:00

CHF

Exports Real MoM (FEB)

--

2.50%

7:00

CHF

Imports Real MoM (FEB)

--

-2.30%

7:00

EUR

German PPI MoM (FEB)

0.10%

-0.10%

After disappointing CPI data on Monday, any missed out of Germany will not be viewed favorable and may put pressure on EURUSD below 1.40.

7:00

EUR

German PPI YoY (FEB)

-0.90%

-1.10%

8:30

CHF

SNB 3-Month Libor Target Rate (MAR 20)

0.00%

0.00%

Watch Jordan’s comments in regards to the EURCHF floor in the context of possible ECB action in the future.

12:30

USD

Initial Jobless Claims (MAR 15)

320K

315K

USD crosses will likely be digesting price action from the FOMC Rate Decision, but USD bulls will be looking for follow through here.

12:30

USD

Continuing Claims (MAR 8)

2880K

2855K

13:45

USD

Bloomberg Economic Expectations (MAR)

--

-3

13:45

USD

Bloomberg Consumer Comfort (MAR 16)

--

-27.6

14:00

USD

Philadelphia Fed Business Outlook (MAR)

4

-6.3

14:00

USD

Existing Home Sales (FEB)

4.62M

4.62M

14:00

USD

Existing Home Sales MoM (FEB)

-0.10%

-5.10%

14:00

USD

Leading Index (FEB)

0.20%

0.30%

21:00

NZD

ANZ Job Advertisements MoM (FEB)

--

2.80%

NZD SSI has come back sharply over the past week from -18 to -3.37 as of Yellen’s presser.

21:45

NZD

Net Migration SA (FEB)

--

3090

23:00

AUD

Conf. Board Leading Index MoM (JAN)

--

0.80%

GMT

Currency

Upcoming Events & Speeches

2:00

CNY

Bloomberg March China Economic Survey

7:15

JPY

BoJ Governor Kuroda Speaks at JCCI

-:-

EUR

EU Leaders Hold Summit (Mar 20-21)

19:00

USD

API Monthly Statistical Report

19:00

USD

API Monthly Statistical Report

20:00

USD

Fed Releases Dodd-Frank Act Supervisory Stress Test Results

SUPPORT AND RESISTANCE LEVELS

To see updated SUPPORT AND RESISTANCE LEVELS for the Majors, visit Technical Analysis Portal

To see updated PIVOT POINT LEVELS for the Majors and Crosses, visit our Pivot Point Table

CLASSIC SUPPORT AND RESISTANCE

EMERGING MARKETS 18:00 GMT

SCANDIES CURRENCIES 18:00 GMT

Currency

USD/MXN

USD/TRY

USD/ZAR

USD/HKD

USD/SGD

Currency

USD/SEK

USD/DKK

USD/NOK

Resist 2

14.0200

2.3800

12.7000

7.8165

1.3650

Resist 2

7.5800

5.8950

6.5135

Resist 1

13.5800

2.3000

11.8750

7.8075

1.3250

Resist 1

6.8155

5.8475

6.2660

Spot

13.2934

2.2478

10.8921

7.7616

1.2684

Spot

6.3739

5.3841

5.9554

Support 1

13.0000

2.1000

10.2500

7.7490

1.2000

Support 1

6.0800

5.3350

5.7450

Support 2

12.6000

1.7500

9.3700

7.7450

1.1800

Support 2

5.8085

5.2715

5.5655

INTRA-DAY PROBABILITY BANDS 18:00 GMT

\CCY

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

Gold

Res 3

1.3953

1.6728

103.84

0.8841

1.1192

0.9043

0.8548

144.06

1381.75

Res 2

1.3930

1.6701

103.60

0.8824

1.1172

0.9021

0.8527

143.71

1376.01

Res 1

1.3907

1.6674

103.37

0.8807

1.1152

0.8998

0.8505

143.35

1370.27

Spot

1.3861

1.6620

102.90

0.8773

1.1112

0.8954

0.8462

142.63

1358.79

Supp 1

1.3815

1.6566

102.43

0.8739

1.1072

0.8910

0.8419

141.91

1347.31

Supp 2

1.3792

1.6539

102.20

0.8722

1.1052

0.8887

0.8397

141.55

1341.57

Supp 3

1.3769

1.6512

101.96

0.8705

1.1032

0.8865

0.8376

141.20

1335.83

v

--- Written by: John Kicklighter, Chief Strategist for DailyFX.com

To contact John, email jkicklighter@dailyfx.com. Follow me on twitter at http://www.twitter.com/JohnKicklighter

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The information contained herein is derived from sources we believe to be reliable, but of which we have not independently verified. Forex Capital Markets, L.L.C.® assumes no responsibility for errors, inaccuracies or omissions in these materials, nor shall it be liable for damages arising out of any person’s reliance upon this information. Forex Capital Markets, L.L.C.® does not warrant the accuracy or completeness of the information, text, graphics, links or other items contained within these materials. Forex Capital Markets, L.L.C.® shall not be liable for any special, indirect, incidental, or consequential damages, including without limitation losses, lost revenues, or lost profits that may result from these materials. Opinions and estimates constitute our judgment and are subject to change without notice. Past performance is not indicative of future results.

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20 March 2014 04:32 GMT