Currencies Expected to See Additional Volatility on Retail Sales and FOMC
- FOMC to leave policy on hold; will be watching data closely
- Retail sales to take on added significance as far as monetary policy concerned
- Euro locked in choppy directionless trade
- Bank of Japan leaves policy on hold as widely expected
- German ZEW mixed; UK trade data stronger
Although the key event risk for the day comes in the form of the FOMC rate decision, the big market mover might in fact come a little earlier when US retail sales are released. At the end of the day, the Fed is not expected to do anything at all at today’s meeting and it would probably be in their best interest to leave its outlook as is. Right now the Fed is in a position where it needs to start to consider the possibility of signaling an earlier reversal of monetary policy than had been anticipated given the better than expected improvement in the US economy. However, it is still probably too early to make any material changes and a wait and see approach is most likely the best course of action for the time being. At the same time, this does make today’s retail sales data all the more interesting, with any signs of strength out of the numbers to do a good job of reaffirming the likelihood for a near-term shift in the outlook of the Fed and a transition to a less dovish policy.
Relative performance versus the USD Tuesday (as of 11:45GMT)
For now, the Euro has been very well supported on dips below 1.3100 and remains locked in some choppy directionless trade. Ultimately, a break back below 1.2975 or above 1.3300 will be required for clearer short-term directional bias. Elsewhere, the Yen remains under pressure and once again tracks to fresh yearly lows against the buck (USD/JPY higher). While there appears to be a very clear medium and longer-term shift in the structure which favors significant USD/JPY upside over the coming weeks and months, short-term studies are however stretched at this point and show room for an initial pullback towards 80.00 before a resumption of gains. The Bank of Japan has left policy on hold as was widely expected, while announcing no new monetary easing measures. The central bank did however enhance a credit facility designed to encourage lending to growth industries. Elsewhere, German ZEW data was mixed while UK trade data was better. The data failed to materially factor into price action.
EUR/USD: Last Friday’s aggressive pullback strengthens the prospects for the end of a corrective move in 2012 which has in fact stalled just ahead of 1.3500. From here, the risks are tilted to the downside and a break below next key support by 1.2975 will be required to officially put the pressure on the downside and open an acceleration of declines back towards the 2012 lows at 1.2620. At this point, only a break back above 1.3300 would alleviate downside pressures and delay outlook.
USD/JPY:The market is doing a good job of showing the potential for the formation of a major cyclical bottom after closing above the weekly Ichimoku cloud for the fist time since July 2007. This further solidifies basing prospects and we could be in the process of seeing a major bullish structural shift that exposes a move towards 85.00-90.00 over the coming months. At this point, only back under 77.00 would delay outlook and give reason for concern. However, in the interim, it is worth noting that gains beyond 83.00 over the coming sessions could prove hard to come by with shorter-term technical studies needing to unwind from their most overbought levels in over 10 years before a bullish continuation. As such, we would caution buying breaks above 83.00 for the time being and instead recommend looking for opportunities to buy on dips.
GBP/USD: The market has been costly confined to trade between the 100 and 200-Day SMAs since early February and the latest break back below the 100-Day SMA therefore suggests that we could be on the verge of a bearish break. The key level to watch comes in by 1.5600, and a break and close below this level will reaffirm bearish outlook and open the door for a more significant bearish decline towards the 1.5000-1.5300 area further down. Inability to establish below 1.5600 however, will suggest that more choppy directionless trade is in the cards.
USD/CHF: Setbacks have stalled for now just ahead of 0.8900 and the market could finally be looking to carve the next medium-term higher low ahead of a bullish resumption and eventual break back above 0.9660. Look for additional gains over the coming sessions back towards 0.9300, with a break above to confirm and accelerate. Ultimately, only a drop below 0.8930 negates and gives reason for pause.
--- Written by Joel Kruger, Technical Currency Strategist
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