USD Under Pressure As Traders Bet The Doves Rule The Roost

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

Tonight is a huge night for traders and markets. That's because the Fed is likely to announce the start of its process of tapering its balance sheet that was allowed to balloon to around $4.5 trillion during its QE programs one, two, and three.

That the Fed's quantitative easing program, and those of the BoJ and ECB, were instrumental in arresting the worst of the financial crisis, to rebuild confidence via appreciating stocks prices, and crashing bond and interest rates, and thus to increase confidence in Main Street to allow an economic recovery to take hold is as obvious as it was successful.

And although the Fed will try to ensure, and markets are currently betting, the balance sheet taper will have little impact on markets the reality is that if QE was needed to drive asset returns so much higher then there is a risk that the withdrawal of this stimulus may work in reverse.

Thankfully what comes with this withdrawal of emergency monetary measures is a globe that is experiencing truly synchronised growth for the first time in a decade. That's a material salve to these worries.

For forex traders in the short term, the key will be what the Fed says about the pace of the taper, the economic outlook, rate rises in 2018, and of course inflation. Are the doves in the ascendancy or is the path to higher rates still entrenched?

With euro back at 1.20, the Aussie dollar above 80 cents, and the US Dollar Index languishing near recent lows traders are poised to either continue the US dollar's recovery, or hammer it mercilessly to fresh lows.

HERE'S A DEEPER DIVE - IN A LITTLE MORE DETAIL AND WITH A FEW CHARTS

Sometimes it’s just about price action and the narrative is written to fit that price action. Last night, the past 24 hours, where the US dollar has weakened a little across most of the forex board looks like one of those. With no incentive for position traders to do anything before the FOMC announcement at 4am AEST tomorrow morning shorter-term traders were, and are, free to find the path of least resistance. And that was a weaker US dollar.

As you can see in this chart of the DXY below, it doesn't even really look like the US dollar has bottomed yet. To make that call we'll need to see it above 92.50, or more likely the September high at 93.33 to be safe.

Chart

Why the markets backed off the US dollar recovery makes obvious sense in hindsight. Frankly I need to give myself an uppercut for not writing this earlier this week. I say that because the last round of Fed speakers we heard from before the blackout period were very much on the Dovish side of the equation. So there is some risk that we see a dovish start to the balance sheet taper in the Fed’s words, its “Dot Plot”, or Janet Yellen’s press conference. I’m not convinced though. I believe the Fed is still on the correct path of policy

Where I failed myself and my readers though is that I’m not convinced it will be a dovish tilt. I've let my own bias that I believe the Fed is still on the correct path of policy normalisation and higher rates, colour my thinking. Hurricanes Harvey and Irma have complicated things a little by dragging growth out of Q3 but there is likely to be give back in Q4. We’ll know in the morning.

The other side of that equation though is also a very powerful message when it comes to the euro. That is it’s clear that euro traders are not listening to the ECB leaks and comments. At least the doves that is.

EUR/USD is up another 0.36% this morning to 1.1995 as the rally for the last 4 or 5 days continues. Like everything else the outlook depends on what the Fed does and says tomorrow morning. But it’s clear in the price action, traders have the disposition to buy Euro until something hits them in the face and persuades them otherwise.

1.2045 and then 1.2090/95 are important resistance levels. In the run up to the Fed though a break of 1.2010 might get things moving.

Chart

USD/JPY is largely unchanged at 111.47 but printed a most intriguing candle.

It could be a short-term sign the top is in or just a pause in the rally. The Nikkei 225 did well yesterday because of yen weakness, and somewhat counter-intuitively, increased expectations of a snap election. And as bonds rise and risk aversion wanes USD/JPY still looks biased to at least test the 200 day moving average. But while below it this is just a counter-trend rally.

Chart

Sterling is up 0.24% after surging earlier on speculation that Boris Johnson was going to resign. I know, go figure. But I guess the betting went that if Johnson, who seems hardline on Brexit, went then May's softer, more conciliatory approach could mean less economic disruption to the UK economy and business. That would be good for the pound. GBP/USD is at 1.3525 this morning.

Anyway, this morning GBP/USD is at 1.3521 this morning. Still looking toppy and vulnerable if 1.3460/65 breaks to the downside.

Chart

The commodity bloc is better bid this morning. are all higher. The AUD/USD is back above 80 cents and I've written my usual AUD/USD piece you can read here. The synopsis is that it's about the US dollar - and there is a neat chart in the post showing this - not iron ore or steel prices.

The kiwi is up 0.75% at 0.7322 and just below important resistance. If it breaks, call it 0.7345/50 to account for the previous day's high, and after finding support at the 200 day moving average recently the outlook would substantially brighten for the kiwi.

Chart

The Canadian dollar is basically flat with USD/CAD down 0.1% at 1.2281. It hasn't taken out my slow moving average but the combination of MACD's in my system suggests its should. The corollary of that is the NZ dollar should fail and the Australian dollar should find resistance above 80 cents to I guess.

Have a great day's trading.