All eyes on the Fed

Summary

• USDCAD: Dollar/CAD sits range-bound this morning, as it did for most of the session yesterday, as traders await the Fed’s latest decision on interest rates at 2pmET today.  The consensus calls for a 25bp hike to 2.25%, but this has been the case for some time now, and so we would argue today’s rate move in Fed funds is largely priced in.  More important, in our opinion, will be chairman Powell’s tone with regard to the statement, and any notable changes to dot plots for 2019 and beyond.  The Fed will also provide 2021 dot plots for first time today.  There’s some talk in the marketplace about whether or not the Fed will drop the word “accommodative” to describe their current monetary policy stance.  One could argue that leaving it would suggest there are still more rate hikes ahead (more to do before we’re back to “normal”) whereas dropping the word may signal an end, or a plateau, to the rate hiking cycle.  The market remains positioned net long USD, not just against CAD but against a number of currencies, which would suggest the market’s reaction to dovish tones may be more sizable than the reaction to hawkish rhetoric.  The pain trade would very much be to sell USD.  If we look at the technicals, USDCAD continues to hug a downward sloping trend-line in the 1.2950 area.  A hawkish hike will likely see us test resistance at 1.2990 or 1.3030, whereas a dovish hike could traders attack the 1.2890s.  A hike with mixed forward signals will likely see us chop around with no clear direction.  November crude oil continues to reject trend-line resistance in the 72.50s.  Last night’s API report came in a little bearish at +2.9M bbl, upping estimates for today’s EIA build to +5.9M bbl.  The weekly EIA oil inventory report comes out at 10:30amET as usual.    

• EURUSD: Euro/dollar has given up the 1.1760s as traders wait for the Fed, and while we would say this is a slightly negative technical development, we don’t think the market does much here until 2pmET.   Over 7blnEUR in options expire between 1.1700 and 1.1800 this morning, with over 2bln concentrated around the 1.1750 area.  More positive Italian budget talk sees Italian bonds rally again today ahead of the formal announcements from the government tomorrow.  The BTP/Bund spread has now ticked below the +230s.  USDCNH continues to creep higher, and now trades comfortably above the 6.87 level.  This is catching our attention because there’s not much resistance on the chart now until the 6.91 level.  Could a hawkish rate hike from the Fed, a “risk off” development on the trade war front or a plunge in EURUSD get us there?  If we look at the EURUSD technicals here, we see support at the 1.1700-1.1725 level, and then at 1.1625 should we get a hawkish Fed hike.  Resistance is currently 1.1760-70, but it will likely not hold provided we get a dovish rate hike, meaning the 1.1820s and the 1.1870s will be next on the radar.      

• GBPUSD: Sterling broke above trend-line resistance in the 1.3160s late yesterday, but the gains stalled at the next resistance level at 1.3190.  Mild selling in European trade then saw the market lose the level, but traders are trying to regain it now as a wave of EURGBP selling comes in.  Brexit continues to cast a shadow over GBP, with rhetoric out of the Labour and Conservative party conferences the likely near term headline risks.  See here for a nice summary of some key upcoming dates.  We think GBPUSD would benefit from any broad USD selling that would follow a dovish rate hike from the Fed today.  We also think the crowded short trade (new high as of last Tuesday, according to the CFTC) will continue to underpin.  Should the market break back above 1.3190, there’s very little chart resistance until the 1.3290-1.3300 level (September’s high so far).  EURGBP continues to pare back gains from last Friday’s GBP massacre, but we’d be on the lookout for month end flows at some point this week, which typically support the cross rate.

• AUDUSD: The Aussie has had a volatile overnight session.  The pair rallied higher with NZDUSD in Asian trade last night after the National Bank of New Zealand’s business outlook survey bounced 12pts higher in September.  More here.  AUDUSD popped into trend-line resistance at the 0.7280 level, but the gains have slowly evaporating in European trade today as the NZDUSD recedes and the broader markets appear to be unwinding short USD bets ahead of the Fed announcement later today.  Given the AUD’s sensitivity to NZD today, expect the RBNZ interest rate decision at 5pmET to garner attention from traders as well.  Markets are expecting no change to the level of overnight interest rates in New Zealand, which currently sit at 1.75%.  Copper trades flat as this hour while gold prices are receding with EURUSD here.  The Aussie is threatening a move back below the 0.7240s at this hour, which would hurt the technical outlook going into the Fed.  The fund short position remains elevated.

• USDJPY: Dollar/yen has managed to tick marginally higher again today, despite yesterday’s pull back in stocks and US yields.  Buyers regained the 112.80s into the NY close and bought the level yet again in overnight trade when tested.  This very much leaves the longs in control here and opens up some uncharted territory on the charts should USDJPY clear the 113.10s.  Next up is the Fed.  The BOJ’s Kuroda will be speaking again early tomorrow morning to business leaders in Osaka.  We’ll also get a slew of US and Japanese data points tomorrow that could provide catalysts for a break higher.  The funds continue to be positioned net long USD (short JPY).

Tune in @EBCTradeDesk for more real-time market coverage.

Market Analysis Charts

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Charts: TWS Workspace

About the Author

Erik Bregar - Director, FX Trading

Erik works with corporations and institutions to help them better navigate the currency markets. His desk provides fast, transparent, and low cost trade execution; up to the minute fundamental and technical market analysis; custom strategy development; and post-trade services -- all in an effort to add value to your firm’s bottom line. Erik has been trading currencies professionally and independently for more than 12 years. Prior to leading the trading desk at EBC, Erik was in charge of managing the foreign exchange risk for one of Canada’s largest independent broker-dealers.

Interested in creating a custom foreign exchange trading plan? Contact Us or call EBC's trading desk directly at 1-888-729-9716.