We have mentioned previously the likelihood of the Fed adopting a cautious tone to future rate hikes, as price action in the USD lacks any significant bullish structure.
Indeed, investor psychology is bearish, and this negative sentiment is keeping prices under pressure, with the USD Index currently testing the 93.81 low of October 2015. We continue to see further USD weakness into the coming months, with a subsequent break of 93.81 opening up critical support at the 92.62 year low of August 2015. A break of here will confirm a significant multi-month bear trend and open up a fall towards 90.00 as investors turn outright bearish USD.
However, is the Fed happy with this scenario? Is Ms Yellen comfortable with the risk of the USD breaking critical support and going into freefall? Is the risk of prices testing the 87.00 (61.8%) retracement of the 2014-2015 rally acceptable?
If the answer is yes, then for the time being there is nothing more to do. Global selling pressure will likely continue, and prices will fall of their own accord towards the 92.62-93.81 support area.
But, if this is NOT ok, and prices need to stabilize, then, to quote Sherlock Holmes, ‘the game is afoot.’
Could the Fed be waiting for USD prices to fall to this critical area, monitoring volume to measure how ‘short’ or ‘underweight’ the investors and traders are? ‘Testing the waters’ with carefully chosen words to decide which course of action to take?
Do they adopt a blunt force tactic, so familiar to those of us in trading rooms of days gone by? Friday afternoon post-lunch haze cut through with ‘Bundesbank on the bid USDDEM!!’ or ‘Get me calls, the Old Lady’s on the bid in cable!!’ A guaranteed solution to halting any immediate trend and sending dealing rooms into a global frenzy as traders look to cover positions before markets close for the weekend.
Maybe they will wrong-foot the markets and suddenly raise rates. Catch people unawares and hit the market when nobody is watching.
Just like the magician preparing a trick. Lots of chatter to the audience to put them at ease, set the mood, direct their attention to one side. And then, ‘Fed raises rates by 50 points!!’
And once again, dealing rooms go into a global frenzy as traders look to cover positions before markets close for the weekend.
Is Ms Yellen a member of The Magic Circle?
