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
A stronger US dollar, almost across the entire foreign exchange universe, suggests that traders and investors have indeed taken the Fed's action, words, and projections from yesterday morning's FOMC decision to have a hawkish bias.
That's been particularly acutely felt by the yen which came under heavy selling pressure as USD/JPY leapt to 110.88 as I write. The euro lost around half a percent, the Aussie gave back all yesterday's gains, Asian currencies were weaker, and it seems like only the pound was able to resist the US dollar surge.
But that was because it had it's own surprisingly hawkish central bank announcement.
So as we head to the end of the week's trade many currencies are near important junctures. And the US dollar could be about to signal a turn.
Here's a deeper dive - in a little more detail and with a few charts
In many ways, traders have been waiting for policy divergence to drive the US dollar higher for some time. But the fact that US data has been the weak link in the global growth chain recently drove expectations that the Fed was the dove as the ECB, and maybe even BoJ, start to talk about an action a policy reversal.
So far this month though the ECB has reinforced that it is still concerned about low inflation and won't be changing its accommodative policy anytime soon. Likewise the Fed reiterated it won't easily be swayed from the path of monetary policy normalisation.
That means higher rates and a smaller balance sheet - think negative QE.
That's the fundamental backdrop to what might be a US Dollar Index which is close to confirming a turn after a solid move higher followed the Fed induced bounce yesterday.
In DXY terms the dollar just needs to get back above 97.80 (currently 97.46) to suggest to me that a bottom is in place. If it does, if it can best this level then a move back toward 9820 then 98.50 opens up. The latter level is important and a break could suggest a run back toward 100.
Sterling stood tall last night and resisted the US dollar's move after the Bank of England surprised almost everyone with a hawkish split vote to hold rates at 0.25%
The surprise 5:3 split vote of the Bank of England’s Monetary Policy Committee suggests the bank might be much closer to a rate hike than many – myself included – though likely.
Indeed with the UK unemployment at the lowest level in years, and an acceleration in inflation to 2.9% - with the BoE saying it will head north of 3% this year - the chances are the bank may act even with the weakness in the recent data flow which has driven the Citibank Economic surprise index to -26.6 – the lowest since May 2016.
Like the Fed the BoE is worried that low unemployment may put upward pressure on prices.
"The continued growth of employment could suggest that spare capacity is being eroded, lessening the trade-off that the MPC is required to balance and, all else equal, reducing the MPC's tolerance of above-target inflation," the BoE said.
For the moment though traders clearly aren't sure what to do with the pound against the US dollar which at 1.2750ish feels like its in the middle of a 1.2630/35 to 1.2850 range. Just the last two days ranges seem to suggest that.
The euro hasn’t been so lucky falling half a percent to a low of 1.1130ish before recovering to around 1.1150 as I write. It remains the case that from a technical perspective I see the 1.1100/10 region as the key level Euro needs to hold with a break likely to lead to cascade toward 1.10.
The big mover of the night has been USD/JPY which is up 110.88 as traders ready for the Bank of Japan’s meeting and decision later today.
Japan is recovering. But the data has started to roll over a little recently and the BoJ is unlikely to want to threaten that by changing policy at this juncture. So while I expect them to be positive on the outlook for growth the still low level of CPI inflation should keep them circumspect when it comes to monetary policy. As a result, they are likely to reiterate the 10-year target at 0%.
That supports USD/JPY. But naturally, a large part of that has been pre-empted with the move in the last 24 hours. My system is long and as I have been writing recently USD/JPY seemed too low at 109 so I expect further strength in USD/JPY.
Last night's high just below 111 is key with 111.60 the next target then 112.24.
Looking at the Aussie now, yesterday’s aborted rally is a sign that the sellers still lurk. The Aussie’s high just above 0.7530 was the second failure in a row below the 0.7540 region I’d identified (being the 138.2% projection of the recent rally) as resistance for the Aussie dollar.
I've written my full daily Australian dollar column which you can read for a deeper dive here.
Last but not least the Canadian dollar hung pretty tough in the past 24 hours. USD/CAD is at 1.3255 this morning. The candle from FOMC day suggests a potential base. But equally the candle for the day ended at 7am Sydney also showed that there are still Canadian dollar buyers happy to sell USD/CAD as it rises.
No doubt that is about the outlook for BoC interest rate policy which Bloomberg reported this morning is now expected to include a rate rise this year. That's ini the wake of BoC governor Poloz's comments this week
"A Bloomberg survey of 17 economists found the majority now project a rate increase this year. Six predict higher rates in October and two suggest a September hike. That’s an about-face from a week ago, when only two forecasters were projecting rates would rise in 2017," Bloomberg wrote.
As it stands the next big move will flow from a break of 1.3160/65 or 1.3300/10 which are the parameters of the last two days ranges.
Have a great day's trading.