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Forex: Dollar Drops after FOMC Weighs in on Currency, But is this a Trend?

Forex: Dollar Drops after FOMC Weighs in on Currency, But is this a Trend?

2014-10-09 04:13:00
John Kicklighter, Chief Strategist
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Talking Points:

  • Dollar Drops after FOMC Weighs in on Currency, But is this a Trend?
  • British Pound: Rate Forecasts Drop Before BoE Decision
  • Euro Traders Ready for ECB President Draghi Commentary

Dollar Drops after FOMC Weighs in on Currency, But is this a Trend?

Given the S&P 500’s impressive rally and the Dollar’s tumble this past session, it would seem that we have experienced a strong sentiment push. Yet, that doesn’t exactly match the quality of the fundamentals on the day. Top event risk this past session for both US and international markets were the FOMC minutes. Heading into the release, the speculative ranks were adrift having overlooked a disturbing assessment of financial stability released by the IMF – building on the concern in their economic forecasts from the previous day. After the 18:00 GMT FOMC minutes release, the situation changed dramatically. The benchmark S&P 500 equity index rallied 1.8 percent – the biggest rally since the opening day of 2013 – and the VIX volatility index dropped 12 percent to 15.1. On the FX side, the Dow Jones FXCM Dollar Index (ticker = USDollar) slipped a modest 0.3 percent but notched a third consecutive drop – the longest series since the bull wave began in July.

In the Fed’s transcript of its September 16-17 meeting, the central bank offered up a far more conservative view of the economic and financial outlook. The market made special note of the assessment that a global slowing in economic activity was a distinct risk to the United States’ health, and record of another discussion on financial stability reveals a deepening concern amongst global officials. With US equities are on the precipice of tumbling out of its 20-month bull trend, this could have been the push needed to tip sentiment into a correction. Instead, the S&P 500 rallied sharply and the safe haven dollar tumbled. Instead of interpreting the risks ahead, traders recognized a softened will for monetary policy normalization. Traders who have grown accustomed – perhaps dependent – on the extraordinary support from central banks were comforted by concerns over a possible harsh interpretation of a change in forward guidance and the negative inflation pressures the strong dollar would impart. Throwing cold water over a timely rate forecast is certainly a concern for the Dollar. However, is another few months of zero interest rate policy (ZIRP) reason to dive into new risky positions? Keep an eye on risk trends as a range of Fed officials speak today.

British Pound: Rate Forecasts Drop Before BoE Decision

The British Pound was a mixed back Wednesday. Splitting its performance on the day amongst its peers, the currency didn’t leverage much of a move one way or the other. Exchange rate price action aside, though, rate speculation seemed to take a significant stumble. Swap spreads for the time frame that the Bank of England (BoE) is expected to begin its tightening phase dropped this past session to their lowest levels in six months. Specifically the 12-month rate forecast has steadily slid to a five-month low of 36 basis points – indicating debate of more than one hike by October of next year. Data has certainly cooled hawkishness / optimism. The RICS House Price Balance specifically this past session furthered a cycle turn and added to cooling in other sectors. Ahead, we have the BoE decision. However, the central bank does not offer its assessment or sentiments when no change is made. So this will likely be more frustrating than illuminating.

Euro Traders Ready for ECB President Draghi Commentary

ECB President Draghi fell far short of speculators and investors expectations when he announced the asset purchase program ‘details’ last week. Those that short the Euro in anticipation of a program that would rival the Fed or BoJ at their peaks – and investors that expected a firm safety net – were instead met with ambiguity. Is Europe’s financial system safe from a reversal in foreign capital inflows and economic crunch? Has the Euro dropped too far in anticipation of stimulus’s influence over yields? The market is pondering this now. Perhaps Draghi will clarify his commitment today when he discusses Europe and central banking with the Fed’s Fischer in Washington at 15:00 GMT.

Australian Dollar Advances after Weak Employment Data, Negative Revisions?

Australia September employment figures were very unflattering. Furthermore, the revisions to August’s ‘too good to be true’ further undermined already shaky confidence in the economy and return to glory for a carry currency. According to the Bureau of Statistics, employers laid off a net 29,700 Australians while the unemployment rate held at its 11-year high 6.1 percent. The previous month’s 121,000-person increase was revised back to 32,100. So, why then did the Aussie recover from early losses? Traders were already prepared and preoccupied with China.

Yen Crosses Gain on Risk Appetite, But Doubt Trails Behind

Like equities, the Yen crosses were buoyed this past session by a hope for a longer draw on the rewards of cheap US funding after the FOMC minutes. Then again, the same doubt that clouds the idea of adding to near a record high and multi-decade low participation move in equities would linger with carry traders. Aggregate 10-year yields on the majors is currently at a 19 month low – a weak appeal on low volatility.

Emerging Market Currencies Mixed, Ruble Intervention Isn’t Working

Though volume was tepid in the deeper waters of the capital markets, turnover picked up heartily for the MSCI Emerging Market ETF to support its 1.5 percent rally. Another ‘risk’ sensitive asset class, it isn’t difficult to divine its motivation. Yet, it is reasonable to question its conviction when we see the mixed FX picture. Half dropped (some heavily) on the day. A standout is the Ruble, which Russia has been buying to curb.

Gold Retreats from Critical Break on Dollar’s Trouble

A sigh of relief from gold bugs. Like US equity indexes, the precious metal was on the verge of breaking through a key level ($1,180) and crashing to multi-year lows. Yet, the dollar’s misfortune seems to have stayed execution. A longer period of low rates in the US paired with growing stimulus in other major regions means an alternative to currencies has some value.**Bring the economic calendar to your charts with the DailyFX News App.

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

0:00

AUD

Consumer Inflation Expectation (OCT)

3.5%

0:30

AUD

Employment Change (SEP)

-30.0K

121.0K

0:30

AUD

Unemployment Rate (SEP)

6.2%

6.1%

0:30

AUD

Full Time Employment Change (SEP)

14.3K

0:30

AUD

Part Time Employment Change (SEP)

106.7K

0:30

AUD

Participation Rate (SEP)

65.0%

65.2%

2:00

JPY

Tokyo Average Office Vacancies (SEP)

6.02

6:00

JPY

Machine Tool Orders (YoY) (SEP P)

35.5%

6:00

EUR

German Trade Balance (euros) (AUG)

17.7B

23.4B

6:00

EUR

German Current Account (euros) (AUG)

13.8B

21.7B

6:00

EUR

German Exports s.a. (MoM) (AUG)

-4.0%

4.7%

6:00

EUR

German Imports s.a. (MoM) (AUG)

0.9%

-1.8%

6:45

EUR

French Trade Balance (euros) (AUG)

-5500M

-5539M

11:00

GBP

Bank of England Interest Rate Decision

0.50%

0.50%

11:00

GBP

Bank of England Asset Purchase Target

375B

375B

12:30

CAD

New Housing Price Index (MoM) (AUG)

0.0%

12:30

CAD

New Housing Price Index (YoY) (AUG)

1.40%

12:30

USD

Initial Jobless Claims (OCT 4)

287K

12:30

USD

Continuing Claims (SEP 27)

2398K

14:00

USD

Wholesale Inventories (AUG)

0.3%

0.1%

14:00

USD

Wholesale Trade Sales (MoM) (AUG)

0.7%

23:50

JPY

Tertiary Industry Index (MoM) (AUG)

0.1%

0.0%

23:50

JPY

Bank Lending Banks inc Trusts (YoY) (SEP)

2.2%

23:50

JPY

Bank Lending Banks ex Trusts (SEP)

2.3%

GMT

Currency

Upcoming Events & Speeches

-:-

ALL

G20 Finance Ministers and Central Bank Govs Meeting

8:00

EUR

European Central Bank Monthly Report

13:45

USD

Fed's James Bullard Speaks on Monetary Policy

15:00

EUR

ECB President Mario Draghi Speaks on Monetary Policy

15:00

USD

Fed's Richard Fisher Speaks on Monetary Policy

17:00

USD

US to Sell $13 Bln in 30-Year Bonds

17:10

USD

Fed's Daniel Tarullo Speaks on Banking Regulation

17:15

USD

Fed's Jeffrey Lacker Speaks on U.S. Economy

17:30

USD

Fed's Richard Fisher Speaks on Monetary Policy

19:40

USD

Fed's John Williams Speaks on U.S. Economy

23:50

JPY

Bank of Japan Meeting Minutes

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

14.0100

2.3800

12.7000

7.8165

1.3650

Resist 2

7.5800

5.8950

6.7400

Resist 1

13.5800

2.3000

11.8750

7.8075

1.3250

Resist 1

7.3285

5.8475

6.5135

Spot

13.3930

2.2618

11.2060

7.7538

1.2697

Spot

7.2098

5.8372

6.3980

Support 1

13.0300

2.0700

10.2500

7.7490

1.2000

Support 1

6.7750

5.3350

6.3145

Support 2

12.8350

1.7500

9.3700

7.7450

1.1800

Support 2

6.0800

5.2715

6.1300

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

1.2850

1.6421

109.56

0.9547

1.1181

0.8873

0.8008

139.63

1245.51

Res 2

1.2825

1.6394

109.33

0.9526

1.1159

0.8851

0.7987

139.35

1239.83

Res 1

1.2801

1.6367

109.10

0.9506

1.1137

0.8830

0.7966

139.08

1234.16

Spot

1.2752

1.6314

108.64

0.9466

1.1093

0.8786

0.7925

138.53

1222.81

Supp 1

1.2703

1.6261

108.18

0.9426

1.1049

0.8742

0.7884

137.98

1211.46

Supp 2

1.2679

1.6234

107.95

0.9406

1.1027

0.8721

0.7863

137.71

1205.79

Supp 3

1.2654

1.6207

107.72

0.9385

1.1005

0.8699

0.7842

137.43

1200.11

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.

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

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