Next 24 hours: The Reverse Sandwich
Today’s report: Fed Down, SNB, BOE, ECB to Go
Overall, the Fed delivered as expected on rates, but the dissents from Kashkari and Evans and a cautiously dovish Yellen presser were enough to inspire a fresh wave of broad based US Dollar selling. SNB, BOE and ECB decisions ahead.
Wake-up call
Chart talk: Major markets technical overview video
- EURUSD
- BOE meeting
- USD outflow
- SNB strategy
- jobs data
- NAFTA worry
- reconsiders bets
- red flags
- Macro accounts
- USDTRYÂ
Peformance chart: Five day performance v. US dollar
Suggested reading
- Yellen’s Legacy is Trickier Than it Looks, Bloomberg View (December 13, 2017)
- Interview with Jonathan Tepper, E. Townsend,  Macro Voices (November 30, 2017)
Chart talk: Technical & fundamental highlights
Choose pair:
EURUSD – technical overview
Despite minor setbacks off a recent recovery high, the outlook for the major pair remains highly constructive. The door is now open for a more immediate resumption of a well defined uptrend that has taken form in 2017. Look for any setbacks to be well supported ahead of 1.1700, for the next major upside extension beyond the current yearly high of 1.2093 and towards the 1.2500 area further up. Only a daily close back below 1.1700 will delay this outlook.
EURUSD – fundamental overview
The Euro has rallied in the aftermath of the Fed decision which produced the as expected 25 basis point rate hike, but leaned more to the dovish side after the decision produced two dissents and a cautious Fed Chair presser. Today we get the ECB decision which will be the highlight of the day and capable of making some waves in the market. Eurozone flash PMIs won’t get much attention, while US retail sales will be overshadowed by the ECB event risk.
GBPUSD – technical overview
The recent push back above 1.3340 now suggests the market is poised for a continuation of the 2017 uptrend, with a higher low in place at 1.3027, to be confirmed on a break of the 2017 high at 1.3658. This will then open the door for a measured move upside extension back above 1.4000 and towards 1.4200 into 2018. Any setbacks should now be well supported into that previous range resistance now turned support at 1.3340.
GBPUSD – fundamental overview
The Pound has held up well in the face of Theresa May's setback, after the House of Commons voted for a meaningful parliamentary vote on the final Brexit deal in 2019. The vote shouldn't have much of an impact right now, though it is more symbolic of the lack of confidence in the PM and her ongoing struggles, especially as we head into today's EU Summit. The Pound has managed to hold up well on the back of the more dovish leaning FOMC decision. The market had already fully priced in a rate hike from the Fed, which left traders selling the US Dollar and buying Pounds on the more dovish leaning tone. There were two dissents, while the Fed Chair was more cautious than what was expected. UK retail sales are due today but will be overshadowed by the Bank of England policy decision and EU Summit. We also get US retail sales later in the day.
USDJPY – technical overview
The major pair has been confined to a range trade for much of 2017, with rallies well capped ahead of 115.00 and dips well supported below 108.00. The latest topside failure off the range high strengthens this outlook, though the market will ideally need to hold below 113.50 on a daily close basis to further encourage the bearish prospect.
USDJPY – fundamental overview
The Yen has not been able to escape the broad based wave of US Dollar outflow from the more dovish leaning FOMC decision. Though the Fed went ahead and raised rates another 25 basis points, this was widely expected and left market participants digesting the overall tone of the decision. The takeaway was an on net more dovish read given the two dissents and a still cautious Fed Chair. Looking ahead, the Yen will be paying attention to US equities and risk sentiment, while digesting the fallout from the SNB, BOE and ECB decision, and also taking in US retail sales.
EURCHF – technical overview
A period of multi-day consolidation has been broken, with the market pushing up to a fresh 2017 high. The bullish break could now get the uptrend thinking about a test of that major barrier at 1.2000 further up. In the interim, look for any setbacks to be very well supported ahead of 1.1400, while only back below 1.1260 would delay the overall constructive tone.
EURCHF – fundamental overview
The SNB will need to be careful right now as its strategy to weaken the Franc could face headwinds from the US equity market. The record run in the US stock market has been a big boost to the SNB’s strategy with elevated sentiment encouraging Franc weakness. Of course, the SNB is no stranger to this risk, given a balance sheet with massive exposure to the US equity market. But any signs of capitulation on that front, will likely invite a very large wave of demand for the Franc, which will put the SNB in a more challenging position to weaken the Franc.  And so, we speculate the SNB continues to be active buying EURCHF in an attempt to build some cushion ahead of what could be a period of intense Franc demand ahead.
AUDUSD – technical overview
Technical studies are in the process of unwinding from stretched readings, resulting in this latest consolidation, which could be well supported for the time being in the 0.7500 area. But overall, the pressure is on the downside and rallies are viewed as corrective while below 0.7900, with the possibility for another downside extension towards 0.7000 not to be ruled out.
AUDUSD – fundamental overview
Wednesday’s impressive Aussie Westpac consumer confidence reading has been followed up on Thursday with another solid data release, this time in the form of first tier Aussie employment data. All of this has helped to accelerate the Australian Dollar’s recovery from recent lows in the 0.7500s. Of course, the other big push here has been on the back of the broad based US Dollar selling on the more dovish FOMC decision read. Looking ahead, US retail sales is the big standout on Thursday’s calendar, though central bank decision fallout from the ECB and BOE decisions could also factor into Aussie flow on the risk implications.
USDCAD – technical overview
Clear signs of basing in this pair, with the recovery from plus two year lows back in September extending through an important resistance point in the form of the August peak. This sets the stage for additional upside in the days and weeks ahead, with the immediate focus now on a retest of the psychological barrier at 1.3000. In the interim, any setbacks should now be well supported ahead of 1.2600.
USDCAD – fundamental overview
The Canadian Dollar has been under consistent pressure since topping out at a plus 2 year high against the Buck in September, with the market reconsidering bets after the BoC's move to hike rates consecutively this year was followed up by a run of softer economic data. Looking out to 2018, there could be more downside risk to the Loonie as the fate of NAFTA comes back into the spotlight, with any talk of a breakup to put more pressure on the Loonie. The Canadian has also not been able to benefit from a recovery in the OIL market in 2017, but has felt the pressure of pullbacks when they happen, as reflected in this week’s price action. And when considering the performance post the dovish Fed decision and broad based US Dollar outflows, it’s clear just how much the market isn’t feeling too great about the Loonie. Looking ahead, we get some Canada housing data, US retail sales and US initial jobless claims. The market will also be watching the fallout from the BOE and ECB decisions.
NZDUSD – technical overview
The market is turning up after recently trading down to a fresh 2017 low in November. The price action has taken the form of a kind of inverse H&S pattern, with the break back above 0.6980 strengthening this prospect and opening the door for a more pronounced recovery into the 0.7200 area. For now, setbacks are expected to be supported ahead of 0.6850 to encourage the outlook.
NZDUSD – fundamental overview
Kiwi has done a good job holding up off recent 2017 lows, and is getting more help from US Dollar selling on the back of the latest Fed decision which produced a more dovish leaning read. It seems the market may have been too aggressive selling the New Zealand Dollar in recent weeks, after the currency fell to a fresh 2017 low in the aftermath of the New Zealand election and this is also inspiring some of the outperformance as traders exit short positions. Still, the combination of an overall softer run of local data, downside pressure on commodities prices and worry about external factors associated with global risk appetite could continue to keep the risk correlated currency offered into rallies. Looking ahead, US retail sales is the big standout on Thursday’s calendar, though central bank decision fallout from the ECB and BOE decisions could also factor into Aussie flow on the risk implications.
US SPX 500 – technical overview
The market continues to shrug off overextended technical readings, with any setbacks quickly supported for fresh record highs. Still, technical readings are tracking well overbought and are in desperate need for a period of healthy corrective action.Ultimately however, it will take a break back below 2557 at a minimum to alleviate immediate topside pressure.
US SPX 500 – fundamental overview
The US equity market continues to be well supported on dips, pushing further into record high territory. It seems, on a macro level, the combination of blind momentum, expectation US tax reform will ultimately work out well and a belief the Fed will remain super accommodative under Jerome Powell are all factoring into the relentless bid. Nevertheless, investor immunity to downside risk is not looking as strong these days and there’s a clear tension out there as the VIX sits at unnervingly depressed levels. The fact that Fed policy is normalising, however slow, could start to resonate a little more, with stimulus efforts exhausted, balance sheet reduction coming into play and another rate hike expected today. It’s important to note that the Fed did go ahead and hike, however dovish they are, and this was the first time the Fed has followed through with forward guidance that now seems to be erring on the side of policy normalization. But for now, it’s more of the same, with the market shrugging off any red flags. At this point, it will take a breakdown in this market back below 2500 to turn heads.
GOLD (SPOT) – technical overview
Setbacks have been well supported over the past several months, with the market continuing to put in higher lows and higher highs, opening a recent push to a fresh 2017 high up around 1357. And so, look for this most recent dip to round out that next higher low in favour of a bullish continuation towards a retest of the 2016 peak at 1375 further up. This latest round of weakness below 1250 is a setback but ultimately, only a drop back below 1200 would negate the outlook.
GOLD (SPOT) – fundamental overview
Solid demand from medium and longer-term players continues to emerge on dips, with these players more concerned about exhausted monetary policy, extended global equities, political uncertainty, systemic risk and geopolitical threats. All of this should continue to keep the commodity well supported, 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. Certainly the US Dollar under pressure in 2017 has added to the metal’s bid tone as well, but there is a growing sense that even in a scenario where the US Dollar is bid for an extended period, GOLD will hold up on risk off macro implications. Dealers are now reporting demand in size ahead of 1200.
Feature – technical overview
USDTRY has extended its record run, with the market contemplating the establishment above major psychological resistance at 4.0000. At the same time, with medium technical studies looking extended, risk is building for a healthy corrective reversal in the sessions ahead. Ultimately, any setbacks should be well supported ahead of 3.6500, with only a break back below this level to force a shift in the structure.
Feature – fundamental overview
The CBRT is in that awful position of needing to decide between reacting to rocketing inflation and a free fall in the currency, or to a sluggish economy that is strained by the removal of any accommodation in place. Of course, the situation is even more stressful for the CBRT, with President Erdogan consistently calling for more accommodation. Monday’s inflation data came in hot yet again and has done nothing to help the central bank’s cause, though we have since seen the Lira recover a little, perhaps with the market feeling more confident in the CBRT taking action as the move will be more justified in the eyes of the government. How the CBRT decides to tighten policy is another question and we could see moves by way of alternative mechanisms.