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USD Price Action a Week Away from FOMC

USD Price Action a Week Away from FOMC

2016-09-13 18:24:00
James Stanley, Strategist
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Talking Points:

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- In this webinar, we used price action to analyze the US Dollar, the S&P 500 and the German Bund ahead of next week’s Central Bank announcements out of the United States and Japan.

- We also looked at USD & SPX500 price action around last Friday’s FOMC commentary from Eric Rosengren of the Boston Fed. After Mr. Rosengren, often considered to be dovish, took a rather hawkish view towards near-term rate hikes equity markets convulsed with risk aversion around the fear of a faster-than-expected rate hike.

- While that risk aversion abated heading into a speech from FOMC member Lael Brainard yesterday, the US Dollar strengthened right back after her speech and has continued to run-higher. Given that we’ve just entered the ‘quiet period’ ahead of the next FOMC announcement, we may see some continuing elements of this theme of USD-strength ahead of next week’s announcement.

- The fear is largely based upon a reversal of the Central Bank support that’s driven many markets to all-time new highs. We looked at the German Bund in this webinar as an example of a market being driven by Central Bank action. If a Central Bank is supporting a market and buying in a rather constant manner, as the ECB has been doing with government bonds, this will get investors to buy-in as well (as this is design); but once Central Banks begin to remove that support, the reasons for being long are no longer as obvious; and this can create selling. Then as prices move lower and without the same Central Bank support that market has become accustomed to, the selling can become more severe.

- This is similar to the retracement that we’ve seen in the Bund since last Friday’s ECB announcement and the ECB didn’t even announce that they were going to end QE; they merely didn’t extend it in September and will likely do so in December. Nonetheless, Bunds were so frothy that they continue to sell-off on this lack of additional stimulus; and that selling created more selling which, as of now, hasn’t yet stopped.

--- Written by James Stanley, Analyst for DailyFX.com

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