The dollar is back strongly ahead FOMC and the decision to raise interest rates
A rise in US bond yields on the eve before the Fed policy rate meeting lifted the Dollar to broad-based gains. The FOMC is widely expected to raise the Fed Funds rate to 1.75% from 1.50% and signal up to 4 rate hikes this year. The Dollar Index (USD/DXY) rebounded to end up 0.54%. The Euro fell 0.74% as German Investor Sentiment fell more than twice than expected. Wall Street stabilised as energy stocks rallied on a rise in Oil prices.
Take away all the headlines and we’re back to the fundamentals. Which is all about policy divergence and rate differentials. The rise in US bond yields was not matched by rises in other global rates. The yield on the Two Year US Treasury jumped 9 basis points to 2.34%. Germany’s two-year bond yield was up one basis point to -0.60%. Bond yields are set to rise further.
The G20 meeting of finance ministers ended with little to show and no impact on the markets.
The Dollar should consolidate at current levels in preparation for the FOMC rate decision and policy statement. (GMT 6 pm, March 21/Local Time 5 am, March 22). Markets have virtually priced 100% in a 0.25 basis point hike in the Fed Funds rate. Following the Fed decision, Jerome Powell faces his first post-FOMC meet press conference as Fed Chief. The first part is a read statement followed by questions from the press. The jump in US bond yields ahead of the Fed meeting suggest that markets see an upbeat assessment of the US economy and a hawkish dot plot.
Sterling eased after the UK’s annual Headline and Core CPI missed expectations. The Bank of England is still expected to signal a May interest rate increase at their policy meet tomorrow.
The Dollar Index (USD/DXY) reversed its losses and rallied to close at 90.410 from 89.878 yesterday. In overnight trading, the high reached was 90.45 which is just under the immediate and strong resistance level of 90.60/70. Further resistance lies at the 91.00 level, a break of which may signal further gains. Immediate support can be found at 90.20 and then 90.00. With US bond yields set to move higher, we should see a gradual test of 91.00. For now, expect traders to bide their time with a likely range of 90.10-90.50.
EUR/USD – slip-sliding away. The Single currency headed down following the sharp drop in German investor sentiment according to the ZEW research institute survey. Concerns on a US-led global trade war as well as recent Euro strength were cited as reasons for the gloomy mood. EUR/USD has immediate support at 1.2240 (overnight low 1.2245). The next support level lies at 1.2220. Immediate resistance can be found at 1.2280 and 1.2310. The speculative community is still long of Euro bets at multi year highs. The risk is for further downside correction should the FOMC signal a hawkish bent. Likely range today 1.2230-1.2290. Look to sell on any bounce.
GBP/USD – The miss on UK CPI saw Sterling do a U-turn and drop toward the 1.4000 level where it found some support. Markets still expect the BOE to signal a May rate rise in tomorrow’s policy meeting. UK Wage growth and employment numbers are due out later today. The BOE wants to see wage pressures building before it raises rates. With yesterday’s Brexit transition deal, the odds against a rate hike have lessened. GBP/USD closed at 1.4003 (1.40 35 yesterday). Immediate support lies at 1.3980 (overnight low 1.39827). Immediate resistance can be found at 1.4020 and then at 1.4040. Likely range today 1.3985-1.4045. Prefer to sell rallies as speculators are still long of GBP bets.
USD/JPY – Comments by Deputy BOJ Governor Masayoshi Amamiya lifted the Dollar Yen in Asian trading yesterday. Amamiya (rhymes with “mamamiya”) said that the Japanese central bank needs to stick with an easy monetary policy to support the economy. Amamiya is one of two new deputy governors at the BOJ. Mamamiya .. Japan Inc has stuck to their script! We can expect more verbal intervention every time USD/JPY threatens their perceived line-in-the-sand. Japanese JGB bond yields in the 2 and 10 year space remain unchanged at -0.16% and 0.03% respectively. Expect the USD/JPY to grind it’s way higher. Immediate support lies at 106.30 and then 106.10. Immediate resistance can be found at 106.60 (overnight high) and then 106.80. With Japan out today (celebrating Vernal Equinox Day), expect consolidation with a likely range of 106.10-107.10. Look to buy dips.
AUD/USD – managed to hold for most of the day around the 0.7715/20 range until US bond yields rose. AUD /USD traded to an overnight low of 0.76789 before settling at 0.7685 at the NY close. The RBA’s February meeting minutes revealed nothing new and had no impact on the Aussie. The yield on the Australian Ten year bond closed unchanged at 2.70%. While the Aussie should get some good support at these lower levels, it’s all about the rate differentials. In its morning commentary Australian bank Westpac made an interesting observation that “A hike in the US Fed Funds rate to 1.75% from 1.5% would finally lift the Funds rate above the RBA’s cash rate.” AUD/USD has immediate support at 0.7680 and then 0.7650. Immediate resistance can be found at 0.7700 and 0.7720. Likely range 0.7675-0.7715. Look to sell on rallies toward 0.7720.
USD/ZAR: The reversal was brief as the rand broke above the R12/$ level quite quickly as the US dollar flexed its muscle this [Monday] morning in anticipation of the Federal Open Market Committee meeting and interest rate decision Today.
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