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FX Update: Dovish FOMC, But Focus Now On Greece, SNB And Norges Bank

Published 06/18/2015, 05:39 AM
Updated 03/19/2019, 04:00 AM

Last night’s US Federal Open Market Committee meeting was more dovish than even the extremely complacent market was expecting, as the statement was little changed, save for minor, if quite positive, adjustments in the language describing the economy.

The problem for USD bulls in the statement was the entire lack of change on guidance from the April statement. Then, in the economic and dot plot projections, the market seems to have fixated on the US Federal Reserve’s upward adjustment of where the unemployment rate will finish 2015, where the range was moved to 5.2% to 5.3% from 5.0% to 5.2%.

The dot plot did not provide any surprise, with a minor downgrade to the expected Fed Funds rate in 2016 (which we can discount anyway because the Fed is no better at forecasting the economy than a random number generator), while the median forecast for 2015 still suggests two rate hikes by the end of this year – though the market is now not even pricing full odds for one hike (December 2015 Fed Funds Futures are six points higher than last week’s low close).

In the press conference, meanwhile, the Fed's chair Janet Yellen said to stop obsessing about the timing of the first hike and to concentrate instead on the eventual path of rates. She also spent a considerable amount of time discussing the strong USD and whether it might continue to provide headwinds from here.

It is very clear that the Fed prefers to lean on the side of caution and that it is far easier to play catch up than it is to risk signalling something prematurely.

Eventually, however, wouldn’t it be interesting if this FOMC meeting proved the Fed’s 'Reverse July 2011 European Central Bank moment', when then-ECB president Jean-Claude Trichet hiked rates in the teeth of the EU crisis? In other words, what if data picks up strongly over the next few months and the market is forced into a painful process of adjusting expectations brutally higher…?
Will the US dollar slide continue?

From here, it is about whether this USD selloff will have any legs, which is extremely difficult to discern, as we are confronted immediately with extraordinary risks swirling around the euro from the situation in Greece. (Does today’s Eurogroup meeting provide any clarity, or are we going to enter the weekend fraught with uncertainty?)

Then there is a Bank of Japan meeting up tonight, at which we should probably expect BoJ governor Haruhiko Kuroda to say very little after he recently made comments on the JPY’s weakness and then tried to unwind their impact.

Tonight’s meeting is critical as USDJPY needs to avoid dipping back below the structurally important 122.00/121.50 area to keep the upside focus alive.

In general, the market will be quick to drop its reaction to this FOMC minutes if strong US data points begin dribbling in, as the Fed is still clearly employing its favoured 'policy in the rear-view mirror' stance. Technically, USD does look under pressure and ready for further losses in the near term unless yesterday’s weakness is quickly erased.

How to trade EURUSD

EURUSD is about the technical and the critical news flow from Greece – a difficult combination to trade. Technically, the rally points to a test higher if we can work above an arguable 'ascending triangle' formation and, above there, what one can argue is the neckline (thicker blue line) of an upside down head and shoulders formation, a break of which might point to a test of the 200-day moving average at minimum.

What holds us back here is the worry that Greek news can spoil the near-term potential for a persistent directional move developing.

EUR/USD

Sterling display

GBP was the big mover to the upside against the US dollar yesterday, as much on a rather hawkish set of Bank of England minutes. They were clearly leaning on the hawkish side of evidence in the UK numbers, and surprisingly choosing very explicitly to look through extremely low inflation figures and underlining the risks of rising wage growth.

They even taking the trouble to suggest that wage inflation could be running hotter than the official numbers suggest.

At the very same moment, we had official earnings numbers released yesterday for April that suggest wage inflation in the UK in April was running at the highest level since the financial crisis. Today we have UK retail sales data, which might actually disappoint after a very strong, weather-inspired April surge in spending.

Flightless kiwi

The long suffering NZD suffered even further late yesterday as a weak GDP raises the odds of another rate cut at the July meeting. The move in NZD is getting overdone soon, but there may yet be room for a test of the 1.1300 area in AUDNZD and possibly a bit more.

Focus on Swiss and Norwegian central banks

Up today, we have the Swiss National Bank meeting, where I suspect the SNB is going to make a lot of noise even if it does not announce explicit policy measures today, perhaps to avoid further CHF strengthening in the event of a Greek default/capital controls/extended uncertainty scenario, and as it is likely gearing up for its next policy response to weaken the currency.

Then we have the Norges Bank, were the risks for NOK upside may weigh those for the downside, even in the event of an actual cut to 1.00% (which the majority are expecting), depending on forward guidance.

If there is no cut, we may see a very large and immediate gapping move back below the 200-day moving average.

Economic data highlights

  • New Zealand Q1 GDP out at +0.2% QoQ and +2.6% YoY vs. +0.6%/+3.1% expected, respectively and vs. +3.5% YoY in Q4


Upcoming economic calendar highlights (all times GMT)

  • Switzerland SNB Meeting (0730)
  • Norway Norges Bank (0800)
  • Norges Bank Governor Olsen to hold press conference (0830)
  • UK May Retail Sales (0830)
  • US May CPI (1230)
  • US Weekly Initial Jobless Claims (1230)
  • US Jun. Philadelphia Fed Survey (1400)
  • New Zealand Jun. ANZ Consumer Confidence (0100)

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