FX Update: FOMC Meeting Headlines Pivotal Week In FX

Asia opened on a sour note today, with August's weaker than expected Chinese industrial production data posting its lowest year-on-year reading in several years. This data popped the cork on what will likely prove a very interesting week, with several major event risks. FOMC: two-way surprise potential? The key event for the week is the Federal Open Market Committee meeting. Simply put, the strong dollar and the rapidly rising long yields in the US suggest that economic growth prospects are looking relatively higher. This could mean that we are seeing an echo of last year’s “taper tantrum,” when then-Federal Reserve chair Ben Bernanke first mentioned the idea of tapering in May of 2013. Unlike that time, actual anticipation of rate moves (in measures like Fed Funds futures) has ranged from extremely modest to non-existent. In other words, there is still plenty of two-way reaction potential depending on how the Fed alters both its statement as well as its economic and policy projections. Fed chair Janet Yellen can’t avoid committing to a path of action and yielding to “incoming data” forever. GBP: Market voting No to Scottish independence This weekend was quiet on the Scottish independence referendum front, especially as compared with last weekend when a watershed Yougov poll showed the Yes vote gaining dramatically. It looks like GBP traders are in a holding pattern at present, with little anticipation of a Yes vote. I also believe that cooler heads will prevail in Scotland, but let’s wait until the real results roll in before we breath any sighs of relief. I suspect that GBP relief could be relatively shallow on a No vote, as so little is currently priced in. One thing to consider is that if the FOMC meeting is “non-dovish”, GBPUSD upside could prove very modest late this week, with more attention on EURGBP downside potentially for those wanting to buy GBP in the wake of a No vote. As we have previously underlined, be aware of the enormous downside risk and the risk of discontinuous pricing in the event that Scotland votes for independence. Do realize as well that we will have accumulated a good deal of UK data before that vote is known, and this will also have a bearing on the GBP's direction. Figures that we are awaiting on this front include Wednesday’s Bank of England minutes, Tuesday's inflation data and the latest jobs numbers as well. SNB: rhetoric or a real move? The Swiss National Bank meeting on Thursday also merits a good deal of attention. As I have written recently, the SNB currently faces an “impossible trinity” in which it can’t have a fixed exchange rate, free flow of capital and control over its monetary policy (which it effectively ceded to the European Central Bank when it declared the EURCHF floor). SNB chair Thomas Jordan might prove able to impress markets with rhetoric suggesting that the bank won't hesitate to move to negative rates to defend the floor (without actually doing so). Eventually, however, a punitive move on large sight deposits will likely to be required to keep the pressure off the floor. This is a matter of when and how much pressure the SNB will be willing to endure, rather than if it will occur. Don’t forget the ECB The ECB will announce the results of its first Targeted Long-Term Refinancing Operation, or TLTRO, in which a smaller than expected take-up would mean a smaller than expected expansion of the ECB’s balance sheet (which is theoretically EUR positive). It could also mean, however, that the market begins looking for the ECB to move toward real quantitative easing — so this reaction pattern isn't necessarily straightforward. On this note, comments over the weekend from the ECB’s Jens Weidmann were not supportive as he warned that he was against ECB purchases that transfer risks from banks to taxpayers. Swedish election The Swedish election is hitting the SEK for losses on the knee-jerk reaction to a more left-leaning government taking the reins of power. This outcome was more or less expected, so for SEK to continue to drive lower beyond perhaps 9.30 in EURSEK, we would need to see additional developments out of Sweden or a “risk off” move. Technical comments on EURUSD This pair tried to head through the local 1.2950/60 area late Friday and overnight and is already finding rejection. Is this a signal that we are headed lower immediately, or can 1.3000 still pull the pair higher? The move is tactically bearish, but event risks this week could move the needle either way. EURUSD: the chart The tactical 1.2960 resistance area was soft late Friday and overnight, but it has held so far. In the big picture, the next major support level at 1.2750 doesn't look particularly far away given how far we have come of late. It looks as if 1.3000 is the major psychological resistance point here.. AUDUSD The ideal 0.8966 target is within reach, and a tactical bounce is possible this week. The die, however, certainly appears cast on the downside. USDCAD The situation here is very similar to AUDUSD, with CAD less weak than AUD. NZDUSD This may take back the initiative relative to AUDUSD if risk appetite begins to hit the market harder this week on the rise in US yields. AUDNZD may not have much more downside potential from here . USDJPY US rates heading higher are bullish, and a hawkish FOMC message would possibly seal the deal on a path toward 110.00. The wild card would be a sell-off in risk appetite, which tends to favour the JPY. We've already seen the JPY pulling higher versus the riskier currencies, even on Friday’s rather modest equity sell-off. This could be a developing theme — see charts like AUDJPY and NZDJPY for examples of similar trends.