USD Awaiting Outcome Of FOMC Meeting On Wednesday

The US dollar took a small step back from its recent highs, as traders and investors awaited key risk events for foreign exchange markets. The dollar was buying 107.25 yen and the euro remained steady at 1.2936.

The Federal Reserve Open Market Committee (FOMC) will convene in Washington later today for its 2-day meeting. This meeting is very important as it will be followed by key material such as updated economic forecasts and the views of the Federal Reserve Board members as to the future evolution of interest rates (the “dot chart”). A press conference by the Fed Chair, Janet Yellen, will also take place. This type of meeting takes place once a quarter and it is the ideal venue for the Fed to set out and explain any changes or modifications to its way of thinking. As tapering will most probably end in October, the event presents an opportunity for the Fed to set out its post-QE strategy.

Markets have been running with the theme of US dollar strength due to the expectation that US monetary policy will tighten prior to other developed countries. Therefore, the Fed could determine the fate of the dollar rally according to the tone of its statement, Janet Yellen’s press conference and the updated economic and interest rate forecasts.

The pound was off, as it traded around 1.6214 as nervousness ahead of the uncertain outcome of Scotland’s referendum peaked. The pound is likely to stage a 200-300 pips rally if the ‘Nos’ have it as results come out by Friday morning, while a ‘Yes’ could see the pound fall around 600 pips. The ‘No’ vote is the favorite to win but according to polls the referendum is too close to call.

Finally the Australian dollar was struggling to hold on to the 90 cent level against the US dollar following the release of the minutes from the Reserve Bank of Australia meeting on September 2nd. The minutes showed that interest rates will likely remain stable for a certain period, that house price gains should be monitored and that the aussie was still too high given also the decline in commodity prices such as iron ore.
UK inflation, the German ZEW investor sentiment survey and the US Producer Price Index will be watched during the remainder of the day.

EUR/GBP steady

EUR/GBP has moved back into the daily Ichimoku cloud and is testing 0.7980. This is a key level since it is the 78.6% Fibonacci retracement level of the 0.7750-0.8813 upleg.

While the overall markets structure has been bearish, downside pressures have eased slightly as the RSI and MACD have both risen and are out of bearish territory. The tenkan-sen and kijun-sen lines are no longer negatively aligned and have flattened out. Sideways action is to continue as also indicated by the cloud twist.

A daily close above the 78.6% Fibonacci gives scope for further upside to target 0.8064 (September 10 high). To the downside, the target comes in at the July 23 low of 0.7873.