Forex Watch

Forex Watch, Fundamental Analysis, fx trader, forex

21 Sep 2016

● USD (NEER) – The dollar appreciated this morning, both in response to the BoJ’s policy announcement (see below) and to the adjustment of positions ahead of tonight’s FOMC meeting, closing not far off the highs hit at the beginning of August. The Fed’s decision should allow the US currency to strengthen further, or at least to consolidate. A decision to keep rates stable this month as well will not affect the dollar, as in this case the Fed will probably indicate its intention to implement a hike before the end of the year (meeting of 2 November or 14 December). On the other hand, a decision to increase fed funds rates would support the dollar, as it would take the markets by surprise, at this point. However, the Fed also indicates that the subsequent rate hike path will be more gradual, upside will be limited.

● EUR – After a triple bottom on Friday’s low at EUR/USD 1.1150, the euro dropped this morning to EUR/USD 1.1123 in view of this evening’s FOMC. If the Fed does not hike rates today, the euro’s upside response should be limited (resistances between EUR/USD 1.1200 and 1.1250) in view of a hike that would only be postponed to November or December, although a decline, at least temporary, into the EUR/USD 1.10 area cannot be ruled out, and would make headway towards EUR/USD 1.09-1.08 in the run-up to the actual hike. On the other hand, a Fed hike already this evening would trigger an immediate drop to EUR/USD 1.10 or lower.

● GBP – Sterling also declined, hitting a low this morning at GBP/USD 1.2946. If the Fed leaves rates untouched, while indicating that it will hike before the end of the year, the drop into the GBP/USD 1.29 area could deepen, albeit with a chance of rising back to GBP/USD 1.30. Against the euro, the depreciation should remain limited to within the EUR/GBP 0.86 area. On the other hand, if the Fed makes its move already this evening, the pound should drop into the GBP/USD 1.28 area, but should find a support at the post-referendum low of GBP/USD 1.2798 if the Fed indicates that the subsequent hike path will be more gradual. Against the euro, the decline should be stronger, to the point of testing the post-referendum lows in the EUR/GBP 0.87 area.

● JPY – This morning’s BoJ meeting brought a significant review of monetary policy strategy, with the adoption of “QQE with yield curve control”. The new strategy is built on two pillars: (1) “curve control”, which aims at directly controlling both short-term and long-term yields, and (2) the “inflation-overshooting commitment”, by which the BoJ undertakes to expand the monetary base until inflation rises stably above the 2% target. Curve control will result in specifying the near-term policy rate (which remains at -0.1%) and a target level for the long-term rate, which will be determined through purchases of 10Y JGBs, so as to keep yields at close to their present levels (around zero). For what concerns purchases, they will be kept “more or less in line with the current pace” at which the stock of JGBs held in the central bank’s portfolio is expanding, i.e. around 80 trillion yen a year. The inflation-overshooting commitment implies that the BoJ will keep expanding the monetary base until core inflation rises stably above 2%. The change in monetary base will fluctuate depending on the operations conducted to control the curve.