Euro, Pound May Fall on Brexit Fears as Post-FOMC Optimism Fades

Talking Points:

• Post-FOMC swell in risk appetite may not find lasting follow-through
• Euro, Pound may fall as Carney and Draghi stoke Brexit-linked jitters
• Yen retraces post-BOJ gains, NZ Dollar drops on RBNZ rate cut bets

The sentiment-linked Australian and Canadian Dollars advanced alongside Asian share prices as risk appetite firmed following the FOMC monetary policy announcement. A flattening of the projected rate-hike path buoyed risk appetite despite unmistakably hawkish rhetoric from Fed Chair Yellen, who all but promised tightening in December (precisely as noted ahead of the event).

Looking ahead, European stock index futures are pointing higher to suggest the risk-on mood is likely to carry forward. Contracts tracking US equity benchmarks are conspicuously flat however, hinting that an up-shift in priced-in 2016 Fed rate hike chances may contain optimism. Indeed, the probability of tightening before year-end now stands at 61 percent, the highest in a month.

Speeches from ECB President Mario Draghi and BOE Governor Mark Carney mark key event risk. Both central banks appear to be in wait-and-see mode for the time being but traders will be keen to hear any Brexit-related commentary. Rhetoric underscoring prolonged uncertainty risk courtesy of the UK referendum outcome and its likely policy implications may weigh on the Euro and the British Pound.

The New Zealand Dollar underperformed overnight after the RBNZ hinted an interest rate cut may come sooner than previously expected. The central bank said “macro-prudential measures and tighter credit conditions [meant to cool the frothy housing market] are having a moderating influence,” opening the door for easing.

Officials previously said excessive house price inflation was growing more broad-based and posed risks to the financial system. Lowering the cost of borrowing against this backdrop threatened to compound the problem, so reining in home values was seen as a prerequisite to stimulus expansion.

The Japanese Yen corrected lower after soaring yesterday. Gains followed the Bank of Japan monetary policy announcement, where the central bank unveiled a redesigned stimulus effort linked to 10-year JGB yields. The currency initially fell as details of the program crossed the wires but swiftly reversed upward once the novelty of the new regime wore off, giving way to skepticism about its efficacy (as expected).

Losing money trading in the FX market? This might be why.

Asia Session

European Session

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

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