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Fed hikes interest rates by 25bp, but gives less dovish than expected guidance

CXI December 20th, 2018

Summary

  • USDCAD: The US Federal Reserve hiked interest rates yesterday by 25bp to 2.50% as expected, but they surprised markets by sticking to the rate hiking path for 2019 (albeit 2 hikes vs 3) along with rhetoric that would suggest they’re not overly concerned about economic growth, the inflation outlook, the impact of quantitative tightening and what the President thinks of monetary policy.  This was a slap in the face for the doves, who are preparing for a much more cautious outlook earlier this week.  The US stock market fell, bonds rallied and the USD rose broadly as a result into the NY close, taking USDCAD all the way up to the 1.3500 mark.  Asian investors piled on to the negativity overnight by taking the Nikkei to a new low and we saw broad demand for JPY come in (another sign of risk-off sentiment).  Then, all of sudden, a surge of EUR demand came in across the board as European markets opened, causing everything else to bounce higher with it.  In a bid to explain this move, some media outlets and market watchers are changing their narratives this morning by saying the Fed was dovish after all.  We don’t believe this, and postulate today’s EURUSD move has more to do with broadly positive EUR technicals and fund positioning…in other words, EURUSD and other EUR pairs didn’t fall back far enough yesterday to warrant bearish NY closes on the daily chart.  Combine this with a surprise rate hike from the Swedes today (first European country to raise rates in 7 years), and one can easily imagine how some new EURUSD shorts, who may have entered yesterday, are now covering.  The EURUSD move higher has now dragged USDCAD back below the trend-line level in the 1.3480s, but another 3.5% drop in crude oil prices this morning is helping to stem the losses.  The US Philly Fed manufacturing survey for December was just released +9.4 vs +15 expected.  We think the 1.3440-90 zone becomes the pivot for price action going into week’s end.  A move above would invite further buying whereas a move below would likely lead to profit taking from the fund longs.

  • EURUSDEuro/dollar is trading significantly higher this morning, but again we would not chalk this down to the narrative of the Fed move being dovish after all.  The market declined swiftly, but it didn’t take out chart support in the 1.1360s that would have registered a negative NY close.  The market held, the traders who sold into the move didn’t get their follow through move to signal a reversal lower, and so it’s not surprising to see EURUSD rebound here.  The swiftness of yesterday’s down move in EURUSD also didn’t leave much chart resistance for traders to anchor themselves to, and so we’ve seen the market shoot all the way higher to some obvious levels in the 1.1460-70 range.  This area is now capping as the Fed debate continues this morning.  The Swedish Krona (SEK) is trading 1.5% higher this morning after the Riksbank raised interest rates 25bp from -0.50% to -0.25%.  We think EURUSD could take another upside stab at chart resistance today, but we would be surprised to see markets go into a lull as well.

  • GBPUSD: Sterling is rallying with EURUSD today, but the market has lost a little momentum since EURUSD stalled in the 1.1470s.  We’ve also seen some energy come out of the market here after the Bank of England announced a unanimous hold on interest rates at 0.75% at 7amET.  While this decision was expected by markets, the tone of the BoE’s press release was tad dovish (slightly downward outlook for growth and inflation).  They also noted increased Brexit uncertainty since November (which is obvious).  We think Brexit will continue to be the dominant driver of GBP sentiment near term as opposed to what the BoE is thinking right now.  It’s been reported today that the UK parliament will reconvene debate on Theresa May’s Brexit deal on January 9th, after the Christmas break.  The UK reported better than expected Retail Sales data for November today (+1.2% MoM vs +0.2% expected).  The chart technicals this morning suggest that we should be prepared for more upside movement, should we close above the 1.2670s.  A move back below would cause further consolidation unfortunately.

  • AUDUSD: The Aussie is getting some much needed support from EURUSD today after yesterday’s post Fed fall in US stocks saw AUDUSD plummet through chart support in the 0.7150-60s.  The 0.7100 was the next stop for the market after the Fed, but buyers stepped in just below that level on two occasions overnight.  The rally in EURUSD during early European trading today then helped AUDUSD retrace half its losses, and we now sit between support and resistance as markets settle into a bit of a lull.  Australia reported better than expected employment growth for November last night (+37k jobs vs +20k expected), but the fact that it was all part time jobs took the excitement out of the figures, and AUDUSD barely reacted to the headlines.

  • USDJPY: Dollar/yen sellers can’t get out of their own way fast enough this morning as the market choses to follow the US stock market/US yield reaction to the Fed announcement yesterday.  After a brief bounce off the low 112s late yesterday, USDJPY hit familiar chart resistance in the 112.60s once again and has remained offered ever since.  Fibo chart support in the 111.90s gave way in early European trade today, and now traders are starring at a US 10yr yield that looks poised to attack the low 2.70s (levels not seen since early 2018).  As we write, the S&P futures are now starting to give up their overnight bounce, and we have a pretty precarious technical breakdown occurring in USDJPY.  The Bank of Japan kept monetary policy unchanged overnight (as expected), but they hinted at risks now being slightly more titled to the downside.  We think USDJPY will continue to struggle here.

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

 

Market Analysis Charts

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Charts: TWS Workspace


About the Author

Erik Bregar

Erik Bregar - Director, FX Trading

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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.


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