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US Dollar, Top Currencies Shift Focus to Fed Hike Implementation

US Dollar, Top Currencies Shift Focus to Fed Hike Implementation

Talking Points:

  • Aussie, Kiwi Dollars Underperform as US Dollar Gains After Fed Rate Hike
  • In-Line FOMC Outcome Hints Near-Term USD Advance May Prove Fleeting
  • Currency Markets Set to Shift Focus to Fed Tightening Implementation Effort

The Australian and New Zealand Dollars underperformed relative to their G10 counterparts as the US Dollar pushed broadly higher following the FOMC monetary policy announcement in overnight trade. Chair Yellen and company issued the first post-QE interest rate hike and signaled that subsequent tightening will be cautious and shallow.

The outcome registered broadly in line with consensus forecasts. Indeed, the breakout of risk aversion would have probably materialized if investors judged the Fed’s rhetoric as hawkish. This was clearly not the case. Indeed, Asian bourses are mostly following Wall Street upward. On balance, this means the greenback’s overnight advance may represent a surface-level reaction that ultimately struggles for follow-through, at least in the near term.

Looking ahead, a relatively quiet economic calendar on the European front will see investors focused on implementation of the Fed’s new policy regime. The Fed Funds rate (FFR) will need to be brought upward from 15bps, the Wednesday close, and into the new 25-50bps target range.

To this effect, the Fed raised the interest rate on reserves to 50bps and authorized the Open Markets Desk to conduct effectively unlimited reverse repo operations at 25bps, with the only constraint being the supply of Treasury securities that the Fed’s traders have on hand. Markets will monitor the central bank’s ability to deliver tightening through this mechanism, tracking its impact on borrowing costs around the financial markets.

If the removal of accommodation proves particularly abrupt, a latent risk-averse response to the Fed’s announcement may yet materialize. That would bode ill for the Aussie and Kiwi Dollars while boosting the anti-risk Euro and Japanese Yen. Alternatively, the opposite dynamic may materialize if the Fed struggles to bring FFR upward as intended.

Gauge Trends and Spot Reversals in the Major Currencies with DailyFX SSI

Asia Session

GMTCCYEVENTACTEXPPREV
21:45NZDGDP SA (QoQ) (3Q)0.9%0.8%0.3%
21:45NZDGDP (YoY) (3Q)2.3%2.3%2.4%
23:50JPYTrade Balance (¥) (NOV)-379.7B-449.7B108.3B
23:50JPYTrade Balance Adjusted (¥) (NOV)-3.3B-206.7B-173.0B
23:50JPYExports (YoY) (NOV)-3.3%-1.6%-2.2%
23:50JPYImports (YoY) (NOV)-10.2%-7.3%-13.4%
01:57AUDRBA FX Transactions Government (NOV)-517M--579M
01:57AUDRBA FX Transactions Market (NOV)485M-516M
01:58AUDRBA FX Transactions Other (NOV)39M-83M

European Session

GMTCCYEVENTEXPPREVIMPACT
06:45CHFSECO December 2015 Economic Forecasts --Low
08:00CHFKOF Institute Winter Economic Forecast --Low
09:00EURGerman IFO Business Climate (DEC)109.0109.0Medium
09:00EURGerman IFO Current Assessment (DEC)113.4113.4Medium
09:00EURGerman IFO Expectations (DEC)105.0104.7Medium
09:00EURECB Publishes Economic Bulletin --Low
09:30GBPRetail Sales Ex Auto Fuel (MoM) (NOV)0.5%-0.9%Medium
09:30GBPRetail Sales Ex Auto Fuel (YoY) (NOV)2.2%3.0%Medium
09:30GBPRetail Sales Inc Auto Fuel (MoM) (NOV)0.6%-0.6%Medium
09:30GBPRetail Sales Inc Auto Fuel (YoY) (NOV)3.0%3.8%Medium
10:00EUREurozone Construction Output (MoM) (OCT)--0.4%Low
10:00EUREurozone Construction Output (YoY) (OCT)-1.8%Low
10:00EUREurozone Labour Costs (YoY) (3Q)-1.6%Low
11:00GBPCBI Trends Total Orders (DEC)-10-11Low
11:00GBPCBI Trends Selling Prices (DEC)--2Low

Critical Levels

CCYSupp 3Supp 2Supp 1Pivot PointRes 1Res 2Res 3
EUR/USD1.06911.08141.08631.09371.09861.1061.1183
GBP/USD1.47451.48831.49441.50211.50821.51591.5297

--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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

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