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One Last Data Hurdle to Clear for USD Pre-FOMC

One Last Data Hurdle to Clear for USD Pre-FOMC

Christopher Vecchio, CFA, Senior Strategist

Talking Points:

- Commodity currencies rebound in line with Chinese equities rallying.

- HY and EM FX most likely to benefit if Fed holds tomorrow.

- See the September forex seasonality report.

The USDOLLAR Index is holding above yesterday's lows, sitting just below 12000, as traders unwind positions ahead of tomorrow's FOMC meeting. Indeed, per the most recent SSI update, the retail trading crowd has reduced open interest across USD-pairs, in what is probably a wise decision to reduce exposure ahead of an event all but guaranteed to bring about a tidal wave of volatility.

After yesterday's disappointing US consumption report, today's August US Consumer Price Index release represents the last major data release before the Fed meets. The breadth of the impact of today's data may prove mixed at best. With headline readings muted and core readings near the Fed's preferred +2% medium-term target, the price growth environment is mixed at best.

It's important to put the data due shortly in context: the Fed is still well-short of the inflation half of its dual mandate per its preferred gauge of inflation, the Core PCE. Per the most recent update, Core PCE inflation is only +1.2% y/y, below the +1.3% to +1.4% y/y range the FOMC projections suggested in June. Because the inflation half of its dual mandate hasn't been met, market participants have more or less priced out the possibility of a September rate hike, with the Fed funds futures contract implied probability showing a 30% chance of a rate rise tomorrow.

AUDNZD Daily Chart: August 2014 to Present

As markets prepare for the FOMC rate decision, it may be in traders' best interest to reduce exposure to USD-pairs (something already happening as noted by the drop in open interest among retail positioning) and look for opportunities elsewhere. One such possibility we've been exploring in recent days has been waiting for resolution in the AUDNZD triangle.

After several months of consolidation and digestion of overbought readings on momentum indicators (daily Stochastics and MACD), AUDNZD finds itself pressing topside swing resistance levels in its triangulation. Accordingly, with policy converging between Australia/the RBA and New Zealand/the RBNZ (with the Australian data relatively improving and the RBNZ introducing new dovish policy measures), AUDNZD may be on the cusp of its next leg higher.

The immediate levels of risk are N$1.1305 to the topside and N$1.0895 below. Depending upon the break of the triangle, risk should be held on the otherside of the swing level with the expectation for a breakout. For example, if a long trade is eyed, entries could be placed above N$1.1305 with a stop below N$1.0895; if a short trade is eyed, entries could be placed below N$1.0895 with a stop above N$1.1305. If the long breakout develops, the pennant/flag formation could eye continuation towards N$1.2250/85 over the coming weeks (100% extension).

Read more: USD Turns to First of Two Major Pre-FOMC Data Prints Today

--- Written by Christopher Vecchio, Currency Strategist

To contact Christopher Vecchio, e-mail

Follow him on Twitter at @CVecchioFX

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.