Talking Points:
- Fed raises upper bound by 25bps, discusses balance sheet normalization, expects inflation
- US Economy shows disappointing deceleration of inflation via CPI, retail sales also falls
- USD Weakness Pauses After FOMC Rate Hike, Clear Resistance in Focus
- Sentiment Highlight: NZD shorts jump on belief strongest G10 currency is overcooked
On Wednesday, the Federal Open Market Committee Raised Rates to 1.00-1.25%, which was a 25bp hike and said they anticipate another hike before the year is over. The rate hike was not a shock, but sticking to their expectations to raise rates through 2019 that puts the terminal rate at 3.00%. This persistence in expected hikes caused USD strength to emerge as Yellen noted that the Fed continues to see conditions favorable in place for inflation to rise.
While the data in the US is recently weak, it is going to be difficult for the market to fight the Fed who expects to continue raising rates. While Yellen noted that the Fed would avoid the risk of hiking too rapidly, they are likely working toward carefully pulling the Fed Funds Rate (FFR) as far away from the zero-bound as possible so that when there is another recession, the Fed will have “bullets” in their gun.
As Yellen spoke, there was a reversal of sorts in G10 FX in favor of the USD. USD/JPY would eventually halve its intraday session drop, USD/CAD would eventually move to new daily highs. The question that many will likely ask after multiple weeks of USD weakness is whether we’ll see a pop after the drop? It’s a question worth asking, and if we see strength in favor of the USD against commodity currencies like the Canadian Dollar, which recently pushed toward 2017 highs and the New Zealand Dollar. Traders can also watch the Dollar Index (DXY) to see if the price can break above two recent lower highs at 97.53/78, there could be a pop indeed in store for USD. However, if the price remains below resistance, I will continue to focus on downside extension targets at 95.85-94.83.
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IG Client Sentiment Highlight: NZD shorts jump on belief strongest G10 currency is overcooked
The sentiment highlight section is designed to help you see how DailyFX utilizes the insights derived from IG Client Sentiment, and how client positioning can lead to trade ideas. If you have any questions on this indicator, you are welcome to reach out to the author of this article with questions at tyell@dailyfx.com.
NZDUSD: Retail trader data shows 18.0% of traders are net-long with the ratio of traders short to long at 4.55 to 1. In fact, traders have remained net-short since May 24 when NZDUSD traded near 0.69967; price has moved 3.8% higher since then. The percentage of traders net-long is now its lowest since Jan 15 when NZDUSD traded near 0.71269. The number of traders net-long is 38.5% lower than yesterday and 42.2% lower from last week, while the number of traders net-short is 1.4% lower than yesterday and 41.2% higher from last week.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests NZDUSD prices may continue to rise. Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger NZDUSD-bullish contrarian trading bias.(Emphasis mine)
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Written by Tyler Yell, CMT, Currency Analyst & Trading Instructor for DailyFX.com
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