EURUSD, 240 min
In yesterday’s report I drew attention to EURUSD creating a pin bar and a higher low. This indicated further bullishness for euro but the upside was capped by the 1.1328 – 1.1378 resistance area. As expected, the pair didn’t move beyond the resistance before the Fed announcement yesterday. The decision to hold the rates at zero propelled EURUSD to the session high of 1.1441. Today, Stochastics are in the overbought region while the price is approaching the upper daily Bollinger Bands. In the weekly picture, price is inside the upper Bollinger Bands and right below the 50 week SMA. This is a reason for some caution for the euro bulls. The price is approaching the 1.1463 – 1.1520 resistance area after we’ve seen some follow through for yesterday’s upward momentum. The nearest support levels are 1.1374 and 1.1388.
FOMC left rates unchanged, citing concerns over global weakness. The key sentence in the statement was: “Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term.” The Fed again noted weakness in net exports, and the fact that market based inflation measures had moved lower. It’s also “monitoring developments abroad,” while it sees balanced risks on the economy and labor market. The FOMC again indicated it will be appropriate to raise rates when it sees further improvement in the labor market and is “reasonably confident” that inflation will move back to the 2% target over the medium term. Lacker dissented in favor of a 25 bp hike. The Fed did reiterate that the economy is expanding at a moderate rate, housing has improved further, and the underutilization of labor resources has diminished.
Yellen said U.S. monetary policy is directed toward achieving the dual mandates set out by Congress. Of course policy changes have many cross currents, and capital flow implications. The exchange rate is one of a number of channels through which policy works. There are effects on the exchange rate, and yes the Fed needs to take those into account. The risk of a government shutdown played NO role in the Fed’s decision not to hike rates. Yellen said there is rationale for a rate hike now, but noted that financial conditions have tightened to some extent, and the situation abroad has become “more uncertain of late.” She added though, that the she doesn’t want to overplay the impact of overseas developments. She also reiterated that the path of policy is more important than the timing of the first move, and that most members still see a hike this year. The decision won’t depend on any particular data. In answering the first question, she said we can’t expect uncertainty to be fully resolved, but the Fed wanted to take a little more time to assess conditions. She has no recipe for what the FOMC wants to see before tightening. On the possibility for October, all meetings are “live.” So October remains a possibility, and the Fed would call a press conference if needed.
Fed funds futures are on the move higher after the FOMC remained on hold. Though prices in the futures market are still gyrating, the market is currently pricing in a 25 bp hike for December with a little better than 50-50 probability. We suspect improved market stability and less angst over global developments will open the door for an October hike, though soft inflation should make December a better bet.
Currency Movers Charts
As the Fed decided not to raise rates the dollar weakness drove other currencies higher. This was especially the case with the commodity price sensitive AUD. Commodities are priced in USD and therefore a lower yielding dollar makes some commodities like Gold more attractive and in general cheaper to buy. This has supported the AUD today.
AUDUSD is trading at a resistance created by 50 day SMA, the 61.8% Fibonacci level, and a historical resistance area between 0.7216 and 0.7276. The pair formed a daily shooting star candle yesterday and is at the time of the writing challenging the high of the candle. GBPAUD is back to the pin bar it created day before yesterday. This is a level where a historical support coincide with 50 day SMA and the lower Bollinger Bands.
Significant daily support and resistance levels for these pairs are:
Main Macro Events Today
Canadian CPI: We expect CPI to expand at a 1.0% y/y pace in August, a slowdown from the 1.3% y/y clip in July. CPI is seen falling 0.2% on a month comparable basis in August after the 0.1% gain in July. Gas prices fell 3.5% in August compared to July, which is expected to drive the decline in month comparable CPI. The BoC’s core CPI index is seen rising 0.2% in August, similar to the action seen in past months of August. Annual core CPI growth is expected to expand at a 2.0% y/y rate in August following the 2.4% clip in July. The expected core CPI figure would, of course, leave the measure at the BoC’s 2.0% midpoint. However, Governor Poloz has maintained that run-up is transitory and not reflective of a tightening in supply conditions.
The US CB Leading Indicator:The August index of leading economic indicators (LEI) is expected to grow 0.2%. We expect yields to help support the headline. The six-month annual gain hit 8.8% in July last year, the highest reading since 10.7% seen in April of 2010. The Conference Board’s preferred recession threshold for the LEI is a six-month annualized reading below -3.5% and a six-month diffusion average below 50%. We wouldn’t read much into this index, as the historical swings “line up” with back data due to repeated “best fit” revisions of the index figures rather than a real-time correlation. The Conference Board revises the index in January, given the massive divergence since 2009 between index levels and reported GDP growth.