Article by ForexTime
Ahead of the widely anticipated FOMC Decision, the Dollar weakened against its main counterparts on Monday. In the days prior to a FOMC Decision/Release, investors closing their positions on the Dollar is fairly normal and given the high stakes at risk with the Federal Reserve this week, further profit taking shouldn’t be ruled out. The Federal Reserve are largely expected to announce that QE 3 is officially over, which is in many ways a vital step towards normalizing monetary policy and could be seen as a reason to purchase the Dollar. However, there are at the very least two reasons why investors are showing anxiety ahead of the decision.
There is always a chance the Federal Reserve could throw a curveball at the financial markets and unexpectedly continue QE, despite only last month confirming the program would conclude in October. Since then, we have experienced a financial market sell-off and confidence in the global economic recovery has weakened. This prompted arguably the most hawkish member of the Federal Reserve, James Bullard to unexpectedly suggest the Federal Reserve should consider continuing QE. There has even been rumours that if US economic data takes an unexpected turn, the Fed are ready to introduce a QE round 4.
There is also an awareness from investors that while US economic data has improved substantially throughout recent months, the chances of the Federal Reserve turning hawkish anytime soon are slim. In honesty, the markets got way too overexcited by the improved US economic performances and beginning to price in a US interest rate. Many are forgetting that the US economic recovery has been extremely slow and at times, in question. It is likely to be only a matter of time before a member of the Federal Reserve, most likely Janet Yellen expresses the US economy is underperforming. If QE concludes as planned, I am still not expecting the Fed to raise rates until around next September.
Due to the USD weakening, the Eurodollar concluded trading at 1.2695 on Monday. In the early hours of Tuesday morning, the pair has already moved as high as 1.2717 with the nearest resistance at 1.2720. If further Dollar weakness occurs on Tuesday, taking out resistance at 1.2720 would open the possibility for the pair to trade at 1.28. Despite the recent Eurodollar appreciation, one shouldn’t be under the impression that the recent upside moves are linked to the EU sentiment improving – it’s a strict correlation to the USD weakness. In fact, the EU sentiment encountered another blow on Monday when the German IFO business sentiment survey slide to a 22-month low. To add further dismay, the IFO expressed it was not expecting economic growth in Q4.
Comments in a Sunday newspaper from one of the Monetary Policy Committee (MPC) dissenters, Ian McCafferty that the Bank of England (BoE) should still raise interest rates now regardless of fears surrounding a possible slowdown in economic data encouraged the GBPUSD to conclude trading at 1.6115 on Monday. There were concerns that the MPC dissenters (currently two) would consider switching votes following concerns over the global economic recovery. There is minimal UK economic data this week, so where the Cable trades is dependent on demand for the USD. Resistance can be found at 1.6128 and this level needs to be surpassed before moves to 1.62 can be considered.
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The USD weakness encouraged the USDJPY to pullback by over 80 pips on Monday, before concluding trading at 107.847. Although there is a strong divergence in economic sentiment between the US and Japan, the Federal Reserve will not be turning hawkish and the Bank of Japan (BoJ) are unlikely to increase stimulus right now. Therefore if investors do close positions on the USD, the chances for a pullback in this pair are very high.
I previously forecasted this pair pulling back to 105 in October and although the move happened earlier than I anticipated, widespread USD weakness could still lead to the pair concluding the month around 106. If the USD does weaken, support for the pair can be found located at 107.099, 106.620 and 106.105.
Written by Jameel Ahmad, Chief Market Analyst at FXTM.
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