Originally published by AxiTrader
Welcome to the Forex Today column.
In it, I'll be trying to add a bit more colour and a lot more charts than I do in my broader overnight Market Wrap I do first thing every morning to set myself and my trading up for each day and each week.
RECAP
Currency markets were roiled this morning after the announcement of what traders viewed as a more hawkish tilt from the US FOMC's meeting caught many by surprise and drove the US dollar, and rates higher.
My sense is that the decision to taper the balance sheet and the stay the course with another rate hike this year and three next is more momentous than many traders, or the price action so far, recognise.
But for the moment what's lacking is the strength of data to support the Fed's path in traders minds. That means the market might have increased the chances of a Fed hike in December to 75.3% from 56.6% yesterday current pricing is only 40% for another move by June 2018.
That's what's holding the US dollar back. Skepticism. And that's why I say the Fed's hawkish tilt questions the paradigm of US dollar weakness but doesn't yet shift it.
For me it's all about the euro. A move through the current uptrend around 1.1820 would be interesting and suggest the US dollar is recovering. But if EUR/USD falls through 1.1660 it would suggest that recovery has become a rally.
HERE'S A DEEPER DIVE - IN A LITTLE MORE DETAIL AND WITH A FEW CHARTS
You can find a deep discussion of what the fed did and said in my overnight Markets Wrap I wrote earlier today.
One thing I do want to draw out though. One that is underappreciated to many forex traders. That is US financial conditions have eased since, and even though, the Fed started tightening rates.
US Financial Conditions (Source: FRED database)
A large part of that is the collapse of the US dollar which has given up around half its 2014 gains. But the NFCI has 105 inputs which measure risk, liquidity and leverage in money markets and debt and equity markets as well as in the traditional and “shadow” banking systems. So it's a broad measure of financial conditions in which the economy is operating.
This is an important point. If folks just focus on growth and inflation right now and the Fed funds rate rather than overall financial conditions – which include for one a weaker US dollar – you get a different picture.
If folks just focus on growth and inflation right now and the Fed funds rate rather than overall financial conditions you get a different picture. One that makes it easier to argue the Fed should leave rates where they are.
But with financial conditions loosening the Fed can run down its balance sheet, and normalise rates toward the mid to high 2% region without threatening the economic recovery and growth outlook.
Now to a few charts.
Euro looks to me like it wants to test the current uptrend which stretches back to March. That level comes in at 1.1820 today. I respect the level naturally but if it breaks, as my system which is short, suggests it might, then we could see a run to 1.1660/80. Below that we are on the way to the garden variety 38.2% retracement at 1.1525 which is now my base case.
USD/JPY is interesting. It's at 112.41 after running up to a high around 112.59 in this morning's maelstrom following the FOMC decision. That means USD/JPY traded through my target around 112.23 - thee 200 moving average.
It's looking bid now and I have penciled in a full range retracement to the highs of the year in the 114.00/50 region now. The BoJ is likely to do little to dissuade forex traders from selling yen at today's board meeting and announcement.
Now that would be paradigm shifting if they do change tack. It would hurt USD/JPY, and the Nikkei, materially. But I don't expect that outcome.
GBP/USD popped last night to a high around 1.3655/60 after the better than expected retail sales data. Retail sales in August rose 1% against expectations of just 0.2%. That saw the year on year rate leap to 2.4% from the previous month's 1.4%.
So it's no surprise the pound went on a run too.
Like elsewhere however, GBP/USD was hammered in the wake of the Fed making a low 200 points below its high at 1.3452ish. It's at 1.3490 now and looking wobbly on the charts as my system readies to sell.
The kiwi and Aussie did relatively well this morning. But that is starting to unwind a little now. That's even though the NZ Q2 GDP data printing a pretty solid 0.8% which left year on year growth at 2.5%.
The kiwi is now sitting at 0.7344 as traders ready for this weekend's election. It is, however, holding above the breakout zone. Although it looks a little tenuous at the moment. As long as 0.7330 holds though the topside could open up - as counter-intuitive as that seems given the other outlooks noted above.
My usual Aussie daily piece is here. The synopsis is the outlook on the day is clouded but overall I favour a move lower to test real support. Much like the euro.
As for the Canadian dollar it's lost ground against the US dollar as my system suggested it would. USD/CAD is at 1.2340 now with next resistance at 1.2430/35. If it can get through there it could go for a substantial gallop toward 1.2520 and then 1.2700/50.
As I come to end of this piece I find myself bullish US dollars. In a rhetorical sense anyway. Last night the US Dollar Index tried but failed to break the downtrend line I highlighted yesterday. 92.60/65 needs to break to signal a bigger move is afoot. I'm watching that as closely as 1.1820 in EUR/USD.
Have a great day's trading.