- USD sentiment remains comfortably negative as investors expect FOMC to remain on hold
- EURUSD still presents some buying opportunities before Fomc, about to test 1,1368. Afterwards, we remain bearish on the pair as the euro zone outlook is clearly negative
- EURCHF - we expect buying pressures to remain strong as negative interest in Switzerland will renew interest in shorting CHF
- USDJPY treading water between 120 and 121,35 waiting for FOMC decision
Heading into Thursday’s long awaited FOMC meeting, the sentiment in USD remains comfortably negative as investors expect the central bank to remain on hold amid concerns about global growth. The dollar index is down 0.60% to 95.11 since Friday and the negative trend gaining momentum. The index broke the 95.19 resistance earlier this morning and is moving towards the next one standing at 92.62 (low from August 24th).
EUR/USD hit 1.1359 during the late Asian session, this is the pair’s highest since August 24th and there is still some opportunity to buy the rally before the FOMC meeting. The single currency is about to test the resistance at 1.1368 (Fibonacci 38.2% on July-August rally), while on the downside, a support can be found at 1.1262 (Fibo 50%).
EUR/CHF is taking a breather after last week’s strong performance. The single currency at one point peaked above the key level of 1.10, reaching 1.1050, before returning quickly below as traders are still not used to seeing EUR/CHF above 1.10. However, we expect buying pressures to remain strong as negative interest in Switzerland, together with encouraging economic data from the euro zone, will renew interest in short positions in the CHF.
In Asia, Chinese mainland shares are off on Monday despite encouraging data for the month of August. Retail sales grew 10.8%y/y compared to 10.6% consensus and 10.5% in July while industrial production missed consensus estimates by 0.4%, printing at 6.1%y/y versus 6.5% expected but beating previous month reading of 6%. The Shanghai Composite is down -4.17% while in Shenzhen shares are heavily sold-off, down 6.90%.
In Japan, disappointing data weighs on the stock market. Industrial production came in on the soft side, printing at -0.8%m/m in July from -0.6% first estimates while July’s tertiary industry activity index was released in line with expectations at 0.2%m/m, below previous month reading of 0.3%. Finally, capacity utilization came in at -0.2%m/m versus 0.7% in June. USD/JPY is treading water between 120 and 121.35 as traders await the Fed’s decision. The Nikkei lost 1.63% and the Topix -1.20%. In Hong Kong, the Hang Seng retreated 0.12% while in South Korea the Kospi fell 0.51%.
In Europe, equity futures are mixed this morning with the Footsie and the CAC trading in positive territory, up 0.31% and 0.23%, respectively. On the other hand, the DAX edges lower, down 0.23% while the SMI and Euro Stoxx are roughly flat. USD/CHF is reversing momentum ahead of the Fed’s meeting, down 1.57% from its peak from last week. The dollar will find a support at 0.9608 (Fib 38.2% on August-September rally), while on the upside, the high from September 9th will act as support (0.9824).
***Yann Quelenn, market analyst: “The European Central Bank left its rate unchanged at 0.05% earlier this month. At the following conference, Mario Draghi warned us that the ECB is likely to expand its asset program purchase beyond 2016. Moreover, it's thought that the ECB is willing to intensify stimulus through the buying of additional bonds. It seems policymakers are concerned about the possible inefficiency of this monetary policy. After years of quantitative easing, both U.S. and Japanese economies are still struggling to get on the path to sustainable recovery. Besides, both countries have astonishing debt-to GDP ratios. We think that QE, coupled with a zero-interest rate policy, only serves to flood equity market with free money but without creating any more value.
Following these declarations, the benchmark 10-year Bund yield is now trading at 0.659% - its lowest level in three weeks. We think that euro zone growth is at stake. By providing hints about the boosting of its bond-buying program, the ECB is maintaining deflationary pressures. And this is not likely to stop any time soon. Last but not least, it is also worth adding that the integrity of the euro zone is in danger as Germany reintroduces border controls with Austria in total contradiction to the principle of open borders, to which most EU member states, have committed. Hence, we remain bearish on the EURUSD. The outlook is clearly negative for Europe. Nonetheless within the next few days, the pair will mainly be driven by the FOMC decision on September 17th. Hold on tight, the week promises to be extremely volatile.”***
Today traders will be watching CPI from Italy; industrial production from euro zone; weekly trade balance from Brazil; import, export and trade balance from India.