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Volatility Expected to Die Down Ahead of Anticipated Fed Event Risk

Volatility Expected to Die Down Ahead of Anticipated Fed Event Risk

2011-09-21 11:39:00
Joel Kruger, Technical Strategist
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  • Greece-Troika talks showing good progress
  • Greek foreign minister offers upbeat comments
  • Yen well bid and approaching retest of record highs
  • Bank of England Minutes on the dovish side; data also disappoints
  • All eyes firmly anchored on FOMC rate decision

Most of the news coming across the wires and moving markets in Wednesday trade has come on the back of developments out of Greece, where good progress is supposedly being made on the troika talks. Although there is no deal to speak of at this point, market participants have been starving for any form of positive news in the region and this progress is certainly welcome. Also propping sentiment in the region have been comments from Greek foreign minister Lambrindis who says that the country will avoid default and absolutely remain in the euro-zone.

Relative performance versus the USD on Wednesday (as of 11:15GMT)

  1. JPY +0.17%
  2. CAD -0.28%
  3. NZD -0.36%
  4. EUR -0.36%
  5. AUD -0.40%
  6. GBP -0.55%
  7. CHF -0.84%

While sentiment towards Greece has picked up a bit, it still hasn’t done much to bolster broader sentiment with European equities weighed down ahead of the North American open. One currency which has been interesting to watch has been the Yen which is threatening a break to fresh record highs against the buck. Although Japanese officials have been quite clear that decisive action will be taken if necessary, this line from the government is not doing anything to keep Yen bulls away at the moment and a much stronger tactic will be needed it seems to prevent further currency appreciation.

Elsewhere, the Pound is holding up rather well considering the release of the Bank of England Minutes which produced some dovish rhetoric. While on the face of it, the Minutes revealed no changes to the voting breakdown on rates and asset purchases, the policy consideration discussed going forward still outlined a slant to the accommodative side. Also seen weighing on the currency was a weaker than expected public finance number which was overshadowed by the Minutes release. We continue to expect to see this market and other currencies broadly offered on rallies so long as the outlook for the broader global macro economy remains in question.

Looking ahead, volatility is expected to lighten up ahead of the highly anticipated FOMC rate decision due later in the day. At this point, there has been a good deal of speculation as to whether a third round of quantitative easing will be implemented and it seems as though anything short of additional monetary easing will be construed as risk negative. We are of the opinion that the Fed will stop short of any formal introduction to QE3 but will at the same time appease investor concern through the mention of alternative strategies that promote appropriate stimulus to inspire recovery in the US economy. If the Fed comes out on the more dovish side then expect the market reaction to be favorable with equities seen rallying while the US Dollar sells off. However, if the Fed is more balanced with its outlook then we could see additional pressure on US and global equities, with the buck accelerating to the upside.

ECONOMIC CALENDAR

Volatility_Expected_to_Die_Down_Ahead_of_Anticipated_Fed_Event_Risk_body_Picture_5.png, Volatility Expected to Die Down Ahead of Anticipated Fed Event Risk

TECHNICAL OUTLOOK

Volatility_Expected_to_Die_Down_Ahead_of_Anticipated_Fed_Event_Risk_body_eur.png, Volatility Expected to Die Down Ahead of Anticipated Fed Event Risk

EUR/USD: The sharp pullback below the July lows and establishment below the 200-Day SMA solidifies the prospects for the carving of a major lower top on the monthly chart which now ultimately projects additional declines down towards the 1.2000 area over the coming weeks and months. The latest inter-day rally off of the 1.3500 area lows has stalled out within our projected lower top region between 1.3835 and 1.4055 and a break back below 1.3500 will confirm the lower top at 1.3940 and accelerate declines down towards 1.3000. Ultimately, only a close back above 1.3940 delays outlook and gives reason for pause.

Volatility_Expected_to_Die_Down_Ahead_of_Anticipated_Fed_Event_Risk_body_jpy2.png, Volatility Expected to Die Down Ahead of Anticipated Fed Event Risk

USD/JPY:This is a market that looks like it trying very hard to establish some form of a base after recently setting fresh record lows just under 76.00. Although the downtrend remains intact and has been fairly intense, longer-term studies welcome the prospects of the formation of a material base and shift in the overall structure. Price action over the past several days has been confirming, with the market very well supported in the 76.00’s and unable to extend the downtrend to fresh record lows. From here, we look for the establishment back above the 50-Day SMA to reaffirm our recovery outlook and accelerate gains towards next key resistance by 80.25 further up. However, Tuesday’s close back below 76.50 delays recovery prospects and likely opens a drop to fresh record lows below 75.95 before the market considers the anticipated bullish reversal.

Volatility_Expected_to_Die_Down_Ahead_of_Anticipated_Fed_Event_Risk_body_gbp2.png, Volatility Expected to Die Down Ahead of Anticipated Fed Event Risk

GBP/USD: Overall price action seems to suggest that this market could once again be looking to roll over in favor of some fresh medium-term declines. Any gains in recent months have proven to be very well capped above 1.6500, and this latest break back below 1.5780 opens the door for a pick-up in bearish momentum towards key support by 1.5345 further down. Any interday rallies are expected to be well capped below 1.6000, while ultimately, only back above 1.6500 would give reason for concern.

Volatility_Expected_to_Die_Down_Ahead_of_Anticipated_Fed_Event_Risk_body_swiss1.png, Volatility Expected to Die Down Ahead of Anticipated Fed Event Risk

USD/CHF: Although daily studies are showing overbought and warn of the potential for a short-term corrective pullback, the recent daily close back above the 200-Day SMA is significant and now opens the door for the next upside extension towards 0.9500 further up. Medium-term and longer-term studies still show plenty of room for upside ahead, while the short-term outlook also remains constructive above 0.8645. Ultimately, only back under 0.8645 delays short-term outlook and would open the door for a more sizeable corrective decline. Still, even at that point, buying into dips would be the preferred strategy.

Written by Joel Kruger, Technical Currency Strategist

If you wish to receive Joel’s reports in a more timely fashion, email jskruger@dailyfx.com and you will be added to the distribution list.

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

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