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Fed Speak Starting to Influence Price Action As Markets Anticipate Policy Shift

Fed Speak Starting to Influence Price Action As Markets Anticipate Policy Shift

2011-03-29 11:55:00
Joel Kruger, Technical Strategist
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It is truly impressive that the Euro remains so well bid overall despite the latest bout of negative developments on the Eurozone peripherals. Market participants continue to price in the likelihood for a rate hike at next week’s ECB meeting and comments from ECB president Trichet that inflation is beginning to show signs of being “durable” have been taken as a further proof that the central bank will indeed act when it meets next week.

Relative Performance Versus USD Tuesday (As of 11:30GMT)

  1. CAD +0.03%
  2. NZD -0.09%
  3. GBP -0.11%
  4. EUR -0.14%
  5. AUD -0.29%
  6. CHF -0.43%
  7. JPY -0.57%

However, we are at least finally starting to see some decent offers on rallies, with European session gains in Eur/Usd stalling out by 1.4150 before the market reversed quite sharply intraday back below 1.4100 and towards daily opening levels. The catalyst for the sell-off was brought on initially by rumors of a troubled German bank and then accelerated on some surprisingly hawkish comments from the usually more dovish Fed Bullard.

The Fed official was responsible for the main USD rally in the European session after saying that the central bank may not be able to wait for global uncertainties to resolve before normalizing policy. Comments from Fed officials in recent days have already been fairly upbeat and hawkish and this only adds to a stronger case for USD bids. Clearly, the upcoming NFP and unemployment data due out on Friday will be important, and any sign of continued improvement in these numbers could help to spark some more meaningful USD bullish momentum.

Elsewhere, while the Swiss Franc and Yen have reigned in volatility after breaking to record highs against the US Dollar, things have been more active on the commodity bloc, with these currencies outperforming in recent trade. But we have a hard time seeing how these currencies can continue to outperform going forward, especially with gold, oil and US equities pulling back. In fact, after putting in a fresh post float record high by 1.0315 on Monday, Aud/Usd has pulled back quite a bit with a bearish gravestone doji like formation to suggest that we could be in the process of carving out a top.

Aud/Usd Daily Chart

Fed_Speak_Starting_body_Picture_5.png, Fed Speak Starting to Influence Price Action As Markets Anticipate Policy Shift

Bloomberg

Finally, the Pound remains relatively well offered as market participants scale bank interest rate expectations following a slew of disappointing economic data and less than hawkish central bank commentary. Any fears over the threat of inflation have been mitigated by the Bank of England, and this leaves markets still very much focused on the recovery in the local economy. Rumors of a better than expected UK GDP result were confirmed on Tuesday, but any Sterling rallies were fleeting, with the data only slightly better than expected and not enough o offset the discouraging money supply data and broader USD bid tone.

Looking ahead, US Case Shiller and consumer confidence readings will be the key focus in North American trade, while market participants will also continue to digest the potential implications of a shift in the direction of monetary policy from the Fed. US equity futures and commodities prices should also be watched closely, with Monday’s bearish closes in these markets warning of deeper setbacks.

ECONOMIC CALENDAR

Fed_Speak_Starting_body_Picture_6.png, Fed Speak Starting to Influence Price Action As Markets Anticipate Policy Shift

TECHNICAL OUTLOOK

Fed_Speak_Starting_body_eur.png, Fed Speak Starting to Influence Price Action As Markets Anticipate Policy Shift

EUR/USD: A closer look at the weekly chart shows the market failing ahead of some key resistance from November 2010 at 1.4280 and reversing to confirm a bearish weekly close and break of a sequence of 5 consecutive weekly higher lows. This certainly warns of the potential for deeper setbacks ahead, and we initially will look for a daily close back below 1.4050 to provide further confirmation for reversal prospects. The 1.4050 level loosely coincides with some rising trend-line support off the 2011 lows and a daily close below this level could accelerate declines towards next key support by 1.3750 further down. Back above 1.4250 delays.

Fed_Speak_Starting_body_jpy2.png, Fed Speak Starting to Influence Price Action As Markets Anticipate Policy Shift

USD/JPY: The latest violent drop-ff to fresh record lows by 76.35 has been intense, with the market threatening a fresh longer-term downside extension below 80.00. However, given the nature of the move, we would not at this point categorize the downside break as anything significant that alters the medium-term outlook. For now, the sidelines are the best place to be and we will look to see where the market closes this week to gain a clearer perspective. A weekly close below 79.75 might open a retest of the 76.35 spike lows, but any additional declines below 76.00 are seen limited. A weekly close back above 81.20 on the other hand, would take the immediate pressure off of the downside.

Fed_Speak_Starting_body_gbp2.png, Fed Speak Starting to Influence Price Action As Markets Anticipate Policy Shift

GBP/USD: The 1.6300 handle continues to be a difficult obstacle for bulls, with the market unable to hold above the figure for any meaningful period of time. As we had warned in the previous daily analysis, the market has once again rejected trading above the figure to set up a bearish reversal exposing deeper setbacks into the 1.5700 area over the coming sessions. Ultimately, only back above 1.6300 delays.

Fed_Speak_Starting_body_swiss1.png, Fed Speak Starting to Influence Price Action As Markets Anticipate Policy Shift

USD/CHF: The latest break to fresh record lows below 0.9000 (0.8910) is certainly concerning and threatens our longer-term recovery outlook. Still, we do not see setbacks extending much further and continue to favor the formation of some form of a material base over the coming weeks for an eventual break back above parity. Look for the market to hold above 0.9100 on a daily close basis, while back above 0.9370 will officially confirm reversal prospects and accelerate gains. Only a break and weekly close below the recent record spike lows at 0.8910 ultimately delays outlook.

FLOWS

Macro, hedge-fund and real money accounts all on the offer in Eur/Usd with an ACB trying to contain the downside. Japanese accounts and momentum types seen on the offer in Aud/Usd. German, Swiss and French banks all on the bid in Usd/Jpy exporter sales seen. A US custodial and Middle Eastern name on the bid in Cable on dips.

TRADE OF THE DAY

Fed_Speak_Starting_body_tradeofday.png, Fed Speak Starting to Influence Price Action As Markets Anticipate Policy Shift

EUR/AUD: A monthly reversal from deeply oversold levels in January forced a shift in the overall outlook for the cross, with our bias turning aggressively bullish. As such, we view the latest inter-day pullback as a formidable opportunity to buy back into the newly established up-trend, with market declines stalling by some shorter-term rising trend-line support off of the early February lows.POSITION: LONG @1.3755 FOR AN OPEN OBJECTIVE; STOP 1.3555.

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Written by Joel Kruger, Technical Currency Strategist

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