Special report: FOMC Preview – Course Correction?
Next 24 hours: US Dollar Gets Boost Ahead of Fed Decision
Today’s report: Next Wave of Volatility Arrives
Most of the price action this week has been subdued, with participants not wanting to make any big decisions ahead of key event risk starting today and extending into the weekend. Today, we get the Fed decision, where everyone will be wanting to know what the Fed has to say about its normalisation timeline and policy outlook.
Wake-up call
Chart talk: Major markets technical overview video
- EU leaders
- Stellar manufacturing
- Golden Week
- Macron momentum
- services PMIs
- Lending giant
- Solid data
- FOMC decision
- Global uncertainty
- USDTRYÂ
Peformance chart: Five day performance v. US dollar
Suggested reading
- VXX Short Utilization Spikes To An Insane Level, T. Durden, Zero Hedge (May 2, 2017)
- Is the US Budget Really Going to Cause Trouble?, A. Scaggs, Financial Times (May 2, 2017)
Chart talk: Technical & fundamental highlights
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EURUSD – technical overview
The market has now cleared major resistance at 1.0906, breaking to a fresh 2017 high, while confirming a higher low at 1.0570. The break strengthens the case for a major bottom and opens the next upside extension towards the 1.1400 area. Setbacks should be very well supported, with only a break back below 1.0570 to compromise the constructive outlook. On a short-term basis, there is room for a corrective decline to fill last Monday’s gap open, with a higher low then sought out in the 1.0700 area.
EURUSD – fundamental overview
Overall, the single currency has been very well bid, trading to 2017 highs and relatively outperforming. The reduction of structural risk from the France election catapulted the Euro in the previous week, while a subsequent release of hotter Eurozone inflation data and a softer round of Monday readings out of the US have helped to keep the currency well supported on dips. Meanwhile, the protectionist policy outlook for the US administration continues to inspire profit taking on long USD exposure. The market has also been comfortable consolidating of late ahead of some big risk this week, which starts with today’s FOMC decision. The tone of the Fed’s statement will have an impact on the rate, while Friday’s US jobs report and the Sunday French election will also factor. Looking out beyond these risks, the Brexit negotiations will also come back into the spotlight, with EU officials talking tough and now demanding a bigger upfront exit payment from the UK, to the tune of Eur100B. Other data being digested today includes German unemployment, Eurozone GDP, US ADP employment and US ISM non manufacturing.
GBPUSD – technical overview
This latest push through 1.2775, the December 2016 peak, is a significant development as it potentially ends a period of bearish consolidation, warning of the formation of a more meaningful longer-term base. The break ends a multi week consolidation mostly ranging between 1.2000-1.2700 with the bullish move paving the way for a measured moved upside extension equal in size back into the 1.3500 area in the days ahead. Still, there is rise for a short-term pullback, though any declines are now classified as corrective and should be well supported ahead of 1.2500 in favour of a higher low and bullish resumption.
GBPUSD – fundamental overview
The Pound has done a nice job holding onto its recent run of impressive gains despite some hard talk out from EU leaders relating to Brexit and demands for higher exit payment to the tune of EUR100B. The UK government has said it will not be paying the higher Brexit fee and the back and forth is starting to intensify. But for the moment, the wave of optimism from the expectation of a stronger UK government in June has been helping to offset downside risk, while speculation over soft US Dollar policy and this latest stellar UK manufacturing PMIs, at a three year high are also contributing to the supported tone. Of course, the market will be watching the Fed decision later today, which has the potential to shake things up depending on how the Fed sounds. Other things to watch on Wednesday are the markets reaction to UK construction PMIs, US ADP employment and US ISM non manufacturing.
USDJPY – technical overview
The major pair has been in the process of recovering in recent sessions out from a fresh 2017 low. Still, at this point, while the market holds below 112.20 on a daily close basis, the risk remains on the downside, with another lower top possibly taking form ahead of a resumption of declines resulting in yet another yearly low. There is a measured move extension objective at 107.60 that has yet to be tested.
USDJPY – fundamental overview
Flows have been light into Wednesday on account of the thinner trading in Asia from the Golden Week holidays. But, overall, all of the moves in the Yen right now are directly correlating with the market’s appetite for risk. And so, with US equities leading the charge back to record highs, the market is once again selling Yen, even in the face of impressive rallies in the other major currencies against the Buck. Looking ahead, if US equities continue to push, expect the Yen to inversely correlate (USDJPY higher), if on the other hand US equities show signs of weakness, the Yen is likely to rally. Much of this sentiment towards risk could be dictated by today’s Fed decision, where the tone of the central bank’s statement could make all the difference. Other data out that should be watched ahead of the Fed event risk are US ADP employment and US ISM non manufacturing.
EURCHF – technical overview
Rallies continue to be very well capped, with the market adhering to a broader downtrend of lower tops and lower lows. The most recent rallies have stalled above 1.0800 and a fresh medium-term lower top is sought below 1.0900 ahead of the next major downside extension through the 2016 base at 1.0624 and towards 1.0400 further down. Ultimately, only back above 1.0900 would negate the overall bearish outlook.
EURCHF – fundamental overview
There is  no doubt that among those who celebrated the results of the first round French election, officials at the SNB were right up there. The SNB has been battling the market for months in an effort to prevent the Franc from appreciating, seemingly drawing an unofficial line in the sand around EURCHF 1.0600. The SNB’s efforts have been met with an aggressive wave of consistent demand for the safe haven Franc, despite the incredible disincentive of negative rates. But the Macron victory has reduced quite a bit of risk in the Eurozone, helping to drive the Euro higher as many market participants feel better about moving back into the Euro and using it as a legitimate funding currency. The EURCHF rate has pushed to a fresh 2017 high and will be looking to see if it can overcome a key obstacle at 1.0900. Still, while the SNB can relax a little, it shouldn’t relax too much as the threat of a vulnerable risk market, should be keeping the central bank on high alert. If global risk sentiment began to deteriorate, it would be difficult to see a scenario where the SNB could fight against such widespread demand for the Franc.
AUDUSD – technical overview
The impressive rally in 2017 has stalled out into significant medium-term resistance ahead of 0.7800. A recent break back below 0.7500 strengthens the prospect for some form of a top and could open the door for a deeper drop back towards the 0.7000 area in the days ahead. Last week’s drop below 0.7475 strengthens the bearish outlook and any rallies should be very well capped ahead of that previous support now turned resistance at 0.7600.
AUDUSD – fundamental overview
Tuesday’s RBA decision was initially a help to an ailing Australian Dollar, with the currency running up on the back of what had been perceived to be a more upbeat central bank despite the RBA leaving policy unchanged as expected. But all of that upside proved to be fleeting, with the currency sold aggressively into rallies on the deeper structural risk for the commodity bloc currencies at the moment. This group is contending with depressed commodities prices, geopolitical tension, fear of US protectionism and yield differentials that are no longer looking as attractive as they once were, particularly with Eurozone and UK political systemic threats being significantly reduced. Earlier today, Aussie services PMIs came in above previous and above 50, though this has done nothing to factor into price action. Looking ahead, the big focus for the day will be on the Fed decision, with the tone of the Fed’s statement to have an impact on direction. Otherwise, we get US ADP employment and US ISM non manufacturing.
USDCAD – technical overview
The uptrend in this market remains firmly intact, getting added confirmation following this latest break to a fresh 2017 high and through a key peak from December 2016 at 1.3600. Any setbacks should now be very well supported above 1.3224 on a daily close basis in favour of an eventual push towards the next measured move upside extension objective in the 1.4000 area. Ultimately, only back below 1.3224 would give reason for pause and delay the constructive outlook.
USDCAD – fundamental overview
The Canadian Dollar was the hardest currency in the developed currency basket in the month of April, with a good deal of that weakness coming from the new US administration's protectionist policies that will make trading with the US more difficult for its partners. The Loonie has since extended declines and sits at fresh 2017 lows in May after dropping +2.50% in April. Last week we heard about the US imposing tariffs on Canada, and despite the more conciliatory talk between the two nations later in the week, with the President agreeing to renegotiate NAFTA, the Loonie hasn’t been able to catch a bid. Weakness in the commodity sector has already been a major drag, with the price of OIL dropping back below $50, only adding to the strain. Meanwhile, there has been another big story out of Canada that is sending Loonie bulls to the exit, on fear over contagion from liquidity woes at ailing mortgage lending giant Home Capital Group. As far as today goes, the market will be watching OIL and headlines relating to the Home Capital Group, while also taking in US ADP employment and US ISM non manufacturing before then turning its attention to the highly anticipated Fed decision.
NZDUSD – technical overview
The overall pressure remains on the downside with the market expected to be very well capped on rallies. The weekly chart is reflective of this fact as it looks like we’re seeing the formation of a major top off the 2016 high, with outlook strengthened on this week’s breakdown to a fresh 2017 low. As such, expect the market to continue to roll over in the days ahead, with setbacks projected towards medium-term support in the 0.6600s. Only back above 0.7100 compromises the outlook.
NZDUSD – fundamental overview
The New Zealand Dollar has been holding up well against its commodity currency cousins this week, but the price action is doing nothing to take away from ongoing underperformance against the major currencies. On Tuesday, Kiwi got a lift from the well received GDT auction and the early Wednesday, Kiwi employment came in strong, helping to extend a recovery from 2017 lows against the Buck. But the gains haven’t been able to hold up on the deeper distress withing the commodity FX bloc, while the subdued wage growth component in the employment data was also a concern. Looking ahead, the big focus for the day will be on the Fed decision, with the tone of the Fed’s statement to have an impact on direction. Otherwise, we get US ADP employment and US ISM non manufacturing.
US SPX 500 – technical overview
The market was unable to break down below major support at 2320, leaving the pressure on the topside and opening the door for this latest run back to record highs. At this point, a push through 2400 will open the door for the next major upside extension towards 2500, while at a minimum, a break back below 2368 would be required to alleviate immediate topside pressure.
US SPX 500 – fundamental overview
Bulls remain in firm control despite the emergence of legitimate cracks at the surface. April’s Fed Minutes citing equity overvaluation and possible balance sheet shrinkage later this year aren’t stock market positive, while the rise in geopolitical tension and worry over US protectionist policies are only increasing stress. Furthermore, the market is waking up to the fact that the new US administration’s alternative take on diplomacy could make for a less predictable path for equity markets. But again, for now, only tiny cracks, with investors still comfortable playing the game of trading sideways (not down) on stress and then rallying to fresh record highs on any signs of an elimination of the stress, given the artificially depressed rate environment. Investors will get more insight later today, with the Fed decision due. If the Fed leans to the accommodative side or shows any signs of backing away from its rate hike timeline, the market will likely use this as an opportunity to push stocks to fresh record highs.
GOLD (SPOT) – technical overview
The market has been very well supported since basing out ahead of 1100 in 2016. This latest break to another yearly high through 1265 strengthens the outlook, confirming the next higher low at 1195, while opening the door for the next major upside extension towards a measured move into the 1335 area. Look for any setbacks to be well supported ahead of 1215, with only a break back below 1195 to compromise the constructive outlook.
GOLD (SPOT) – fundamental overview
Solid demand from medium and longer-term players continues to emerge on dips, with these players more concerned about the limitations of exhausted monetary policy, extended global equities, political uncertainty, systemic risk and geopolitical threats. All of this should continue to keep the commodity in demand, with many market participants also fleeing to the hard asset as the grand dichotomy of record high equities and record low yields comes to an unnerving climax. Meanwhile, a bout of US Dollar selling (bullish gold on inverse correlation) in 2017 has also kicked in as the market gives more serious consideration to US policies that are likely to direct the US Dollar lower. Dealers now talk of sizable demand into the 1215-30 area.
Feature – technical overview
USDTRY has been in a period of choppy consolidation since topping out at a fresh record high earlier this year. At this point, despite the latest pullback, the structure continues to favour the topside, with scope still existing for a bullish continuation to yet another record high. At a minimum, a daily close back below 3.5000 would be required to potentially force a shift in the outlook and open the door for a more significant bearish corrective phase.
Feature – fundamental overview
A lot of positives for the Lira of late, with this latest CPI data coming in hotter than expected, confirming recent hawkish moves by the CBRT. The Lira had been bid up in recent days following  another CBRT surprise tightening by way of the “late liquidity window” (LLW) and an upbeat Minutes highlighting reduced risk to the economy and a better growth outlook. But overall, despite recent gains, the currency market is still taking time to digest the latest result in the Turkish referendum which produced a narrow “Yes” victory for President Erdogan. On the one hand, the result can be viewed as Lira supportive as it reduces political uncertainty which should translate into more stable economic policy. On the other hand, the move to grant an unlimited amount of power to the President could pose risk on the global stability front, which would be viewed as Lira bearish. It’s worth noting that one major bank’s TRY positioning indicator shows FX managers holding long exposure at more than 300% of the average hold, which could warn the long TRY position is overcrowded. This is even more compelling when one considers broader macro risk and today’s Fed decision.