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Pound Surges, Bitcoin Plummets Ahead of Pivotal FOMC Meeting

Pound Surges, Bitcoin Plummets Ahead of Pivotal FOMC Meeting

Talking Points:

- Next week brings a pivotal Federal Reserve rate decision in which the world will be waiting to hear about balance sheet reduction.

- The British Pound has continued to display strength after yesterday’s rate decision, and crypto-currencies put in a collapse-like move while both Gold and Yen sold-off.

- Sentiment in GBP/USD remains elevated, currently showing -2.67. Given retail sentiment’s traditional contrarian nature, this is bullish for the pair.

- Want to see how GBP, and USD have held up to the DailyFX Q3 Forecasts? Click here for full access.

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It’s been a rather active 24 hours across currency markets, and next week brings a really big rate decision out of the Federal Reserve. While no changes to rates are expected, the highly-untested rout of balance sheet reduction will be at the forefront of the discussion; and this can keep USD-pairs volatile because the world has never seen Quantitative Tightening in action and few know what to expect from markets’ response to such a strategy.

One thing that has become clear, and perhaps even more so over the past 24 hours: Markets are shifting rate expectations as the Fed stares down balance sheet reduction. This is likely due to skepticism that the Fed will be able to both reduce the balance sheet while also hiking rates. Given that higher rates (or the potential for) are the key drivers for currency prices, the fact that the Fed has shifted their tightening focus to the balance sheet while Central Banks in Europe and now the U.K. begin to explore rate hike scenarios provide a backdrop for those shifting rate expectations and, in-turn, currency prices. This is what’s driving those key trends in EUR/USD throughout 2017 and more recently in GBP/USD.

At the Bank of England’s rate decision yesterday, the BoE signaled that a rate hike may be in the cards near-term; and with a Super Thursday set for November, this appears to be a viable target date for that rate adjustment. As we wrote yesterday, this signal from the BoE opens the door for bullish continuation in the British Pound as we near that next rate decision. But this theme caught another gust of wind this morning when noted BoE dove, Gertjan Vlieghe, opined that he might be on board with a rate hike in the near-future. This is a big deal because it highlights a potential consensus within a bank that’s seen a maximum of three votes for a rate hike since 2011, and this makes the prospect of a near-term hike out of the BoE look even more-probable.

GBP/USD Daily: Jump to Fresh Yearly Highs, Break Above Key 1.3500 Level

Chart prepared by James Stanley

For GBP/USD, we just broke above the key psychological level of 1.3500, and just ahead is another potential area of resistance at 1.3575. If resistance does show at 1.3575, traders can look for higher-low support in the zone from 1.3475-1.3500.

If you want to see some fireworks, scroll over to GBP/JPY, which is now 1,000 pips higher than the low from just three weeks ago. As we wrote yesterday, GBP/JPY was running up against a very key resistance level at 148.46. This is a Fibonacci retracement that had helped to set the high in December of last year, and subsequent attempts to take out that resistance failed in May and again in July as lower-highs printed on the chart.

But yesterday saw prices move up to this level and pause. Then last night North Korea launched another missile over Hokkaido, Japan, leading to risk aversion. But that was very brief, as that quick dip was soundly reversed after support came-in at prior resistance; at which point bulls took over and smashed prices through the psychological 150.00 level on the pair. A clear shift is taking place here…

GBP/JPY Daily: Fresh Yearly Highs, 1,000+ Pips of Run Past Three Weeks

Chart prepared by James Stanley

Crypto Collapse

The British Pound wasn’t the only market with extreme volatility. Crypto-currencies have continued a collapse-like move that many are associating with the recent Chinese ban. And this does make sense; however, it appears as if something else may be taking place as the past day of weakness in Bitcoin and other crypto-currencies seems to align very well with sell-offs being seen in the Japanese Yen and Gold prices. So, while the Chinese ban is likely contributing to this move-lower, there’s probably another factor that’s assisting with this weakness.

Bitcoin Daily: 40% Drop in September, Current Support at Prior Resistance

Chart prepared by James Stanley

The big question around Bitcoin is the game of limbo: How low can it go? And really, there is no good answer for right now after the Chinese government’s move. We are currently seeing a rather vigorous bounce off of a prior point of resistance at 2,980; but at this point, the move still appears to be corrective in nature. Jamie Dimon previously had some pretty brutal comments on Bitcoin, and then just a couple of days later we heard from the Chinese government. This theme is likely not over, as crypto adoption isn’t really in the best interest of many/any major economic decision makers. The more prominent the run in crypto might become, the more voices we’ll hear speak-out against it until, eventually, other governments move to do what China has just done (to whatever degree they may be able to do it). The idea that major governments might willingly cede control of their currency over to the masses is one that will likely be looked upon as delusional in nature.

Bitcoin Hourly: Bounce Finds Sellers at 23.6% Fibonacci Retracement

Chart prepared by James Stanley

Next Week’s Fed Meeting

The big price action question here is whether we finally get a low in the Greenback. Given the veracity of the 2017 move, it might be hard for traders to muster any optimism behind this scenario. But perhaps more important is the growing disconnect between the Federal Reserve and market expectations for rate hikes going out to the end of next year. The Fed has previously said that they expect four hikes out to the end of 2018. Markets are currently pricing in one going out to August of next year. As the Fed has started to become more vociferous around the prospect of balance sheet reduction, this disconnect has grown, and so has skepticism that the bank will be able to manage a dual-tightening mandate, by which they’re tightening the money supply through both balance sheet run-off and higher rates.

The Fed began talking about this at their March rate decision, and that’s when matters appeared to take a turn for the worse in the U.S. Dollar. The Fed hiked rates at that meeting, and the U.S. Dollar put in a very bearish move, and that’s pretty much continued into current date.

U.S. Dollar via ‘DXY’ Daily: Down-Trend Hastened After March Rate Hike (red box)

Chart prepared by James Stanley

The big question around the U.S. Dollar for next week is whether we can finally see some element of bullish price action, which is something that hasn’t really shown up since before the bank began talking about balance sheet reduction. While this might sound outlandish, for the U.S. Dollar to all-of-the-sudden turnaround as the Fed does what they’ve been saying that they’ll do, the prospect of a USD sell-off with a -12% loss throughout a year in which the bank has remained hawkish while hiking rates three times would have probably sounded pretty ridiculous, as well. But that’s what we have. If the Dollar does not pose any element of bullish price action, traders can continue to look to sell the Dollar against both the Euro and the British Pound. If we do see bulls return in USD, setups in USD/JPY and NZD/USD can be especially attractive.

--- Written by James Stanley, Strategist for

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