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Fed Decision Comes into Focus; Policy Outlook to Influence USD Direction

Fed Decision Comes into Focus; Policy Outlook to Influence USD Direction

2012-01-25 06:22:00
Joel Kruger, Technical Strategist
  • Focus shifts to US Dollar and FOMC rate decision
  • Euro bears looking to sell into additional rallies
  • Australian inflation readings not as soft as expected
  • Yen comes under pressure and could see additional weakness

While it is hard to imagine any storylines these days without the Eurozone crisis at the front and center, the dynamic could shift a bit on Wednesday with the Fed set to make its policy decision. The key focus for investors will be whether there are any signs of additional quantitative easing, and just how long the central bank is prepared to keep rates at ultra accommodative levels. Clearly any signs of accommodation lasting for longer than projected, or signs of additional accommodation would open the door for another bout of broad based US Dollar depreciation. However, we are not convinced that this will in fact be the case and given the sustained recovery signs in the US economy, we could start to see the Fed move in the opposite direction, as they begin to plan for a reversal of monetary policy.

As far as the Euro is concerned, we believe that there is still some upside in the cards and contend that those who are Euro bearish are now waiting for some more clarity on the Greek PSI deal before establishing any fresh short positions. The logic here is that any favorable Greek resolution will likely open another rally in the Euro before the market finally relents to the deeper Eurozone issues and once again grows uncomfortable with the outlook for the Euro currency. Our forecasts call for a move towards 1.3500 over the coming days from where we will also look to establish fresh meaningful short positions. We see Eur/Usd locked in a well defined downtrend off the 2008 record highs which projects weakness over the coming months down towards 1.2000.

Moving on, the Australian Dollar has once again managed to shake off any negative sentiment resulting from some much weaker employment data in the previous week, with the latest inflation data coming in not as soft as expected and opening the door for renewed bids in the commodity currency. However, we still see risks tilted to the downside at current levels and feel that the market is too comfortable buying this currency on any form of a dip. The RBA will still likely move to accommodate further at its next meeting and the economy continues to show signs of deterioration. Elsewhere, the Yen has come back under pressure in recent sessions and from here we continue to project relative underperformance with Usd/Jpy seen accelerating beyond 78.30 and towards key resistance at 79.55 over the coming days.


Fed_Decision_Comes_into_Focus_Policy_Outlook_to_Influence_USD_Direction_body_Picture_5.png, Fed Decision Comes into Focus; Policy Outlook to Influence USD Direction


Fed_Decision_Comes_into_Focus_Policy_Outlook_to_Influence_USD_Direction_body_eur.png, Fed Decision Comes into Focus; Policy Outlook to Influence USD Direction

EUR/USD: The market has finally managed to find some bids and although the broader underlying trend remains intensely bearish, the risks from here are for additional corrective gains back towards the 50 and 100-Day SMAs in the 1.3100-1.3400 area before the next lower top carves out. Some falling trend-line resistance has already been broken on the daily chart and the 10-Day SMA has now crossed back above the 20-Day SMA to provide added confirmation for short-term bullish structural shift. Setbacks should now be well supported ahead of 1.2800, while only a daily close back under this figure would negate short-term bull bias. A bullish reversal week further supports short-term constructive outlook.

Fed_Decision_Comes_into_Focus_Policy_Outlook_to_Influence_USD_Direction_body_jpy2.png, Fed Decision Comes into Focus; Policy Outlook to Influence USD Direction

USD/JPY:Despite the latest pullbacks, we continue to hold onto our constructive outlook while the market holds above 76.55 on a daily close basis. We believe that any setbacks from here should be limited in favor of a fresh upside extension back towards 79.55 over the coming weeks. Look for a break above 78.30 to confirm and accelerate, while only a daily close below 76.55 negates and gives reason for pause.

Fed_Decision_Comes_into_Focus_Policy_Outlook_to_Influence_USD_Direction_body_gbp2.png, Fed Decision Comes into Focus; Policy Outlook to Influence USD Direction

GBP/USD: The market has mostly been locked in some sideways chop over the past few weeks with any rallies very well capped ahead of 1.5800 and setbacks supported on dips below 1.5300. Until either side is convincingly broken, we would expect to see additional range trade. Therefore the preferred strategy is to look to buy range dips and sell by range highs. Only a weekly close above 1.5800 or below 1.5250 would give reason for outlook shift.

Fed_Decision_Comes_into_Focus_Policy_Outlook_to_Influence_USD_Direction_body_swiss1.png, Fed Decision Comes into Focus; Policy Outlook to Influence USD Direction

USD/CHF: Although our overall outlook remains intensely bullish, the market is in the process of some interday consolidation before the next major upside extension beyond 0.9600 and towards parity. As such, from here, we see risks for additional setbacks towards 100-Day SMA by 0.9100 from where a fresh higher low is sought out. Ultimately, only a sustained break back under 0.9000 would negate constructive outlook and give reason for pause. Dips towards the psychological barrier should therefore be used as formidable buy opportunities.

--- Written by Joel Kruger, Technical Currency Strategist

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