The meeting of the Federal Open Market Committee (FOMC) is dominating the markets today and traders are waiting for this event
The Dollar Index (USD/DXY) advanced ahead of the most anticipated Federal Reserve meeting this year. The FOMC is widely expected to raise its discount rate by 0.25% to 1.5%. An increase in US wholesale inflation data (Core PPI) supported the Greenback’s advance. A fall in German ZEW Business Confidence weighed on the Euro which dropped 0.32%.
Wallstreet stocks rose on growing optimism that Republican lawmakers would be able to overhaul the corporate tax regime. The S&P 500 rose to another record, up 0.17%.
The yield on the US Ten Year bond was up one basis point to 2.40%. Germany’s Ten Year Bund yield climbed to 0.31% from 0.29% yesterday.
Outlook: Data still matters. Last night’s strong PPI lifted the Dollar and yields ahead of the Fed’s two-day policy meet which begins today. US Consumer inflation (CPI) report will be released ahead of the FOMC. The Fed is widely expected to raise the discount rate by 25 basis points. This is completely priced in the Dollar. With traders now on standby, expect recent ranges to hold until the meeting.
Markets will be closely watching the Fed’s accompanying statement. The majority of forecasters are expecting three rate hikes through next year. Bond traders are apparently expecting only two. And some Fed watchers are looking for four rate increases.
Trading View: The Dollar Index (USD/DXY) advanced 0.17% to 94.096 from 93.858. The Dollar’s rise was not broad-based. Economic data released yesterday had an impact on the Dollar and the Euro. Sterling, however, remained heavy as initial optimism on Brexit negotiations fades. While robust UK inflation numbers initially boosted the Pound, it didn’t last long. The Australian Dollar kept it’s bid tone and was the strongest performer among the currencies.
Political developments favored the Dollar with optimism growing that Republican lawmakers would be able to pass business supportive tax cuts. Watch this space, it’s a race to the finish before the month, and year-end.
The Dollar keeps its bid into the Fed meeting. Where do the risks lie?
- No change in rates from the Virtually no one has mentioned this in their commentaries. What if? In the FX markets, everything is possible. If this happens, the Dollar will immediately plunge. Even if there are more rate hikes planned for 2018.
- The Dollar’s climb last night was not broad-based. That’s most likely because even if the Fed do hike, the accompanying statement will determine the next moves. Inflation could still be a concern and this will be scrutinised in the statement. How many rate hikes for 2018? If there are less than three, say two, then the Greenback could lose ground. If there are four rate hikes suggested, the Dollar will soar.
- The SNB, ECB and BOE policy meetings are the following day (tomorrow). All are expected to keep policy unchanged, although the ECB will reveal its plan to taper asset purchases.
Keep your respective levels as well as the speculative market positioning in mind.
EUR/USD – Immediate support lies at the 1.1710/20 level (overnight low was 1.17175). These are the lows in November. Immediate resistance can be found at 1.1750 and then 1.1770. The speculative community is still long of Euro. Last nights high was at 1.17927. Likely range until the FOMC, 1.1710-1.1770. Look to sell rallies to 1.1800
AUD/USD – kept its bid and traded to an overnight high of 0.7580. That remains as immediate resistance. Strong resistance can be found at 0.7600. Immediate support can be found at 0.7540 and then 0.7520. The Aussie held the 0.7500 level well and this strong support level should hold. Tomorrow’s Australian Employment report will be monitored. In spite of tepid wages which has affected retail spending, employment had been solid all year. Speculative long Aussie bets have gradually been trimmed since their highs in late September. Likely range prior to Fed, 0.7540-0.7580. Prefer to sell rallies to 0.7600, the speculative community is still long.
GBP/USD – continues to drift lower. Yesterday’s UK CPI beat expectations but it’s boost to the Pound was short-lived. Markets have become increasingly skeptical of last week’s Brexit deal. GBP/USD has immediate support at 1.3300 (overnight low 1.33033). The next support lies at 1.3280. A clean break of 1.3280 could see us back to 1.3200. A broad-based US Dollar rally following a hawkish Fed could see Sterling hammered. Likely range today 1.3280-1.3360.
USD/JPY – closed at 113.55 (113.50 yesterday). The Dollar had a subdued trade against the Yen between 113.37 and 113.75. Immediate resistance lies at 113.70/80 and then 114.00. USD/JPY has immediate support at 113.30 and then 113.10. Once again, it will be the US Ten year yield that will impact this currency pair. Wherever that happens to go following the Fed meeting. Keep in mind that among the currencies, the Yen has the largest number of speculative bets. Likely range 113.35-113.75. Prefer to sell rallies to 114.00.
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***Information contained in this newsletter are gathered from third parties and should not be regarded in any way as trade advice or recommendations by CM Trading. CM Trading does not recommend or advise traders or investors in their decision making but merely provides information from the market for its clients as additional information is made available as per the events occurring in the financial markets.
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