We use a range of cookies to give you the best possible browsing experience. By continuing to use this website, you agree to our use of cookies.
You can learn more about our cookie policy here, or by following the link at the bottom of any page on our site.

Free Trading Guides
EUR/USD
Mixed
Low
High
of clients are net long.
of clients are net short.
Long Short

Note: Low and High figures are for the trading day.

Data provided by
GBP/USD
Bearish
USD/JPY
Bullish
Gold
Bearish
Oil - US Crude
Bearish
Bitcoin
Mixed
More View more
Dollar Checks Back in Anticipation of FOMC Decision

Dollar Checks Back in Anticipation of FOMC Decision

2014-09-17 03:31:00
John Kicklighter, Chief Currency Strategist
Share:

Talking Points:

  • Dollar Checks Back in Anticipation of FOMC Decision
  • British Pound Volatility but Noncommittal After Inflation Report
  • Euro Traders Will React to Fed and then ECB

Dollar Checks Back in Anticipation of FOMC Decision

This week’s top event risk is upon us. The Federal Reserve’s monetary policy meeting carries deeper meaning than just a quick move from the US Dollar. Given the fundamental platform the market has been built upon over the past few years – low participation, excessive leverage and a dependency on low volatility conditions – the impact of this event could ripple throughout the financial system. Yet, for those looking for the quick market-based evaluation of how the central bank’s actions and forecasts are being interpreted by the trading ranks, there are three benchmarks to monitor through the event: the US Dollar, the S&P 500 and US Treasury yields.

Before we can appreciate the full influence this policy meeting can impose on the financial system through short-term volatility and more enduring trend developments, we first must understand why it is important. This is not a standard FOMC meeting. While the central bank will almost certainly ‘Taper’ (reduce its monthly QE3 purchases) for the second-to-last time, there is far more too this particular gathering. As this is one of the quarterly meetings, the policy group will also release its updated forecasts on employment, inflation and interest rates. We are also due a press conference from Chairwoman Janet Yellen. These are crucial to reconciling a growing disparity in speculators’ rate expectations and even the projections the central bank itself is trying to shape. While the Dollar has rallied an incredible 9 straight weeks – matching the longest series on records going back nearly 50 years – Fed Funds futures are still discounting the Fed’s last set of forecasts.

There is serious risk in having the market’s views deviate too far from the central bank’s. The longer and broader the divergence, the more dramatic the eventual reconciliation. We have seen individual FOMC members and Fed-sponsored research mention this concern. There has also been a considerable anxiety from both local (Fed officials) and global (OECD, BIS, other central banks) groups over excessive risk taking and little regard for cooling economic trends nor the eventual end of stimulus. If the Fed is truly concerned about this imbalance, they will try to make an effort to clarify without committing. Many believe that can come in removing ‘considerable time’ for rates, but it may run deeper.

British Pound Volatility but Noncommittal After Inflation Report

GBPUSD carved out a 150-pip range Tuesday. That’s a substantial oscillation given the trend for the pair through the preceding week and the focus on upcoming major event risk. However, volatility in the wake of UK inflation figures for August is not surprising. Rate forecasts for the BoE are a critical fundamental driver for the sterling both in the 12-month rally through July and the subsequent retracement over the past two months as markets backed off their convictions of a 2014 first hike. However, the 1.9 percent core CPI does little to increase the price pressures raises limited speculative ire when we have something as open-ended as the Scottish Referendum ahead of us. The vote’s potential ramifications are so broad that the market will be similarly cool to today’s BoE minutes and August jobs data.

Euro Traders Will React to Fed and then ECB

The ECB (European Central Bank) is scheduled to announce the take up of its first TLTRO (targeted, long-term refinancing operation) Thursday – the first upgrade in the group’s balance sheet in over two years. Given the aggressive decline for the Euro and Euro-area lending rates over the past months, the market clearly cares. Yet, is it allowing for much of a surprise from the event? Whether the appetite for the loans are light or heavy, they have a target for increasing the balance sheet back towards ‘beginning of 2012’ levels (€600 billion to €1 trillion higher from here) . Meanwhile, a change in Fed tack can leverage the pressure on the Eurozone to do more to calm its markets.

Yen Crosses: Be Careful of a Risk Response to Fed

Most traders will be staring at charts of the Dollar, US equities and perhaps even USDJPY as the FOMC event unfolds. However, the Yen crosses may be just as exposed – if not more – than those assets with closer geographic proximity. These pairs have advanced on an explicit assumption of global stimulus. The effectiveness of the BoJ’s efforts depend on the international effort being made. And, the appetite for carry is dependent on risk appetite which is extremely exposed to the one of the biggest stimulus providers reversing course.

Australian Dollar Rallies After PBOC Announces Fresh ‘Stimulus’

This past session didn’t open particularly well for the Australian dollar as Chinese direct investment numbers printed at a four-year high and suggested the country’s largest trade partner continued to cool. That concern turned though when it was reported that China’s five largest banks would receive 500 billion yuan in liquidity to bolster the system. This isn’t a large scale move, so its lasting impact is dubious.

Emerging Markets Rally Before the Fed?

Are Emerging Markets ignoring impending event risk? The MSCI ETF posted a strong 1.3 percent rally after its recent cascade on the largest volume jump in six weeks. In the FX world, most of the liquid EM currencies gained significant ground against the US Dollar. This is not likely a new trend rather just a position adjustment. Many EM central bankers have warned of the risks they face due to the Fed’s actions.

Gold Bulls Ready Should the Fed to its Dovish Rhetoric

Gold is down 3.1 percent on the week, and the precious metal has trended lower for more than two months. An outlook of rising interest rates and the reversal of stimulus programs (which bolsters the value of fiat currencies) have certainly sunk into the precious metal. Yet, if there is a delay from the Fed for a return to norm, gold traders would still likely take advantage with a short-term rally.

**Bring the economic calendar to your charts with the DailyFX News App.

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

22:45

NZD

Current Account Balance

-1.000B

1.407B

0:30

AUD

Westpac Leading Index (MoM)

-0.10%

1:45

CNY

MNI September Business Indicator

8:30

GBP

Claimant Count Rate

2.90%

3.00%

These Events are important to the BoE as these events show how strong the job market is. A low Jobless claim change and strongly increasing weekly earnings can show a strong labor market.

Shows the situation of the labor market

8:30

GBP

Jobless Claims Change

-30.0K

-33.6K

8:30

GBP

Average Weekly Earnings (3M/YoY)

0.50%

-0.20%

8:30

GBP

Weekly Earnings ex Bonus (3M/YoY)

0.70%

0.60%

8:30

GBP

ILO Unemployment Rate (3M)

6.30%

6.40%

Shows the situation of the labor market

8:30

GBP

Employment Change (3M/3M)

120K

167K

9:00

EUR

EURo-Zone Consumer Price Index (MoM)

0.10%

-0.70%

9:00

EUR

EURo-Zone Construction Output s.a. (MoM)

-0.70%

These measures can be important as they could show how well the construction sector is performing. However, these measures are volatile

9:00

EUR

EURo-Zone Construction Output w.d.a. (YoY)

-2.30%

9:00

EUR

EURo-Zone Consumer Price Index (YoY)

0.30%

0.30%

Important to ECB as monetary policy is strongly hinged on inflation target set by the ECB. The inflation rate has been steadily declining for the past two years

9:00

EUR

EURo-Zone Consumer Price Index - Core (YoY)

0.90%

0.90%

9:00

CHF

ZEW Survey (Expectations)

2.5

It has declined steadily this year from 41

11:00

USD

MBA Mortgage Applications

-7.20%

12:30

USD

Consumer Price Index Ex Food & Energy (MoM)

0.20%

0.10%

Inflation being able to meet the Fed’s 2 percent target is important. Higher inflation might indicate that the Fed needs to tighten policy and potentially tighten monetary policy. The CPI index has been at 1.9% which is close to the Fed’s inflation target but still below it.

12:30

USD

Consumer Price Index Ex Food & Energy (YoY)

1.90%

1.90%

12:30

USD

Consumer Price Index (MoM)

0.00%

0.10%

12:30

USD

Consumer Price Index (YoY)

1.90%

2.00%

12:30

USD

Current Account Balance

-$113.4B

-$111.2B

A higher CA balance is positive for GDP growth

14:00

USD

NAHB Housing Market Index

56

55

It shows the condition of the housing market. A number of above 50 is considered good

18:00

USD

Fed QE3 Pace

$15B

$25B

The Fed has been steadily decreasing the pace of QE purchases this past year. Reduction of purchases might signal that the economy is improving. Increasing rates might signal that the economy getting stronger.

18:00

USD

Federal Open Market Committee Rate Decision

0.25%

0.25%

GMT

Currency

Upcoming Events & Speeches

7:00

EUR

ECB Board Member Mersch Discusses Collateral, Liquidity

8:30

GBP

Bank of England Minutes

18:30

USD

Janet Yellen Holds Press Conference Following FOMC Statement

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

13.5800

2.3800

12.7000

7.8165

1.3650

Resist 2

7.5800

5.8950

6.5135

Resist 1

13.3250

2.3000

11.8750

7.8075

1.3250

Resist 1

7.3285

5.8475

6.3145

Spot

13.1524

2.1625

10.7255

7.7502

1.2554

Spot

7.0676

5.7562

6.2669

Support 1

12.8350

2.0700

10.2500

7.7490

1.2000

Support 1

6.7750

5.3350

5.7450

Support 2

12.6000

1.7500

9.3700

7.7450

1.1800

Support 2

6.0800

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

1.3026

1.6421

106.13

0.9394

1.0948

0.9406

0.8352

137.23

173.13

Res 2

1.3003

1.6393

105.94

0.9376

1.0932

0.9390

0.8335

136.99

172.81

Res 1

1.2980

1.6365

105.75

0.9359

1.0915

0.9374

0.8319

136.75

172.48

Spot

1.2934

1.6309

105.36

0.9324

1.0882

0.9341

0.8285

136.28

171.83

Supp 1

1.2888

1.6253

104.97

0.9289

1.0849

0.9308

0.8251

135.81

171.19

Supp 2

1.2865

1.6225

104.78

0.9272

1.0832

0.9292

0.8235

135.57

170.86

Supp 3

1.2842

1.6197

104.59

0.9254

1.0816

0.9276

0.8218

135.33

170.54

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

Sign up for John’s email distribution list, here.

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.

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

DISCLOSURES

News & Analysis at your fingertips.