Saxo Bank: USD nears pivotal supports in EURUSD and dollar index
Posted: 17 March 2017 | John J Hardy, Head of FX strategy, Saxo Bank | No comments yet
Market observers offer a wide variety of interpretations of both the Federal Reserve’s rate hike this week and the market’s reaction to it.
- Market has uncorked massive risky assets rally in response to FOMC rate hike
- Signals indicate Fed will always undershoot the market to avoid upsets
- Others interpret move as indicative of Fed desire to be taken seriously by market
- ECB’s Nowotny spoke of potential to hike deposit rate before refi and end of QE
- 99.27 level in dollar index a 38.2% retracement of rally from mid-2016 lows
- BoE caught market off guard with stiff and pre-emptive language on inflation risks
- We would be more positive on sterling if UK short rates responded more forcefully
- Look out for G20 finance ministers meeting risks, although little is expected
Market observers offer a wide variety of interpretations of both the Federal Reserve’s rate hike this week and the market’s reaction to it. Some believe the market uncorking a massive rally in risky assets despite the hike is the market boldly thumbing its nose at the Fed, believing that the central bank will never hike sufficiently to seriously threaten its third mandate, the S&P 500.
The fact that the Fed failed to adjust its dot plot as high as market expectations had forecast suggests that this is a sign that the Fed will always undershoot the market to avoid upsetting the apple cart. Others suggest that the Fed was hoping to be taken more seriously by the market (as a Goldman strategist suggests).
If the latter is the case, however, we would need to see more Fed hawkishness aimed at countering the aggressive ramping in US equity markets of the last couple of months.
The more neutral interpretation is that the Fed wants to unwind policy accommodation at a gradual pace and will only alter that pace based on incoming economic data. Regardless, we still need to watch for the potential that the Fed is getting uncomfortable with the market’s behavior, and the obvious campaign to shift expectations for a March hike may have been the first sign of this.
The European Central Bank’s Ewald Nowotny was out commenting late yesterday on the potential for the ECB to hike the deposit rate before the refi rate and even before the end of quantitative easing, which saw EURUSD adding to recent strength and coming within grazing distance this morning of the 1.0800-50 zone – the structurally critical area for the pair.
Note as well the 99.27 level in the dollar index, which was a major low and the 38.2% retracement of the dollar rally from mid-2016 lows.
The Bank of England meeting yesterday caught the market off guard. Most observers, including myself, thought the BoE would sit this one out until it can draw a bead on economic risks once the Brexit negotiation period gets under way in the months ahead. Instead, we had some fairly stiff and pre-emptive language on inflation risks, with one dissenting voter calling for a rate hike and indication in the minutes that other voters are leaning for a hike as well if inflation levels continue to pick up. This shocked sterling higher, with important technical levels now in play for GBPUSD (see below), but possibly also for GBPJPY.
We would be more positive on sterling if UK short rates had also responded more forcefully to yesterday’s BoE developments. But alas, UK two-year rates are more or less where they were a month ago, though they have pulled about 6 bps from the late February lows, far less than US rates have.
Look out for G20 summit risks into the weekend, though little is expected, and US treasury secretary Steven Mnuchin made polite noises on “free and fair trade” as opposed to just free trade, while reiterating the old strong-dollar policy in a few limited statements yesterday. The draft G20 communique that has been circulating has removed language discouraging protectionism.
Cable is approaching important resistance within the range at the 1.2400 area, the approximate zone of support in the prior range and also near the pivotal 61.8% Fibonacci retracement level of the recent sell-off. Bulls need a charge above this level to shift attention to the big range resistances above 1.2700.
The G10 rundown
USD – the key for USD bulls is whether the “dovish” Federal Open Market Committee surprise was a one-off with no further implications, in which case, focus switches to Trump administration policy making and incoming data.
EUR – the euro is approaching a major resistance level in the form of 1.0800-50 in EURUSD. Can we transition above such a level without knowing the French election result? The German-French spread erased the tightening after the Dutch election result yesterday.
JPY – JPY risks generally to the downsie if yields stabilize and head higher. Watching the range in USDJPY and watching GBPJPY for breakout potential, as outlined in yesterday’s FX Board.
GBP – a smart little rally, but we need actual UK rates to participate in the enthusiasm to suggest there is a fundamental leg to stand on – though positioning likely also could provide plenty of fuel if a further squeeze does develop.
CHF – bogged down in the range – we’ll watch relative rate spread moves and SNB sight deposit data for signs of when EURCHF interest could pick up.
AUD – the aussie is trying to maintain the rally stance, but really needs to prove itself through the next resistance areas in AUDUSD above 0.7750 or enthusiasm after the one-off FOMC-inspired impulse higher will quickly fade. Downside pivot 0.7650-00.
CAD – USDCAD finding new support levels into 1.3300, though bulls will want a rally to take out 1.3450 again before finding tailwinds for a charge on the highs for the cycle.
NZD – the kiwi continues to look weak and we like further weakness until proven otherwise, starting with NZDUSD as long as we remain below 0.7100-50. The Reserve Bank of New Zealand up next week and interesting to see how they treat the latest weak GDP data.
SEK – EURSEK looking heavy and ready to mount an assault on the lows for the cycle below 9.42, with few event risks of note for Sweden over the next couple of weeks.
NOK – NOK looking weak if oil prices don’t recover again, 9.20+ potential in EURNOK if the recently established range holds .
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