“Hawkish” FOMC
The market was positioned for significantly dovish adjustment in the latest Federal Open Market Committee statement and didn't get what it was looking for, sparking sharp USD gains.
First, as was almost universally expected, the FOMC entirely eliminated the last 15 billion/month of asset purchases, thus bringing QE3 to an end.
Second, fairly prominent mention was made of low inflation, but it was particularly hawkish relative to the recent obsessive market focus on deflation risks that the FOMC indicated its belief that inflation will soon track closer to the Fed’s 2% target after short-term risks of a dip related to energy and other costs and that long-term inflation expectations “have remained stable”.
And not surprising, given that weekly jobless claims are at their lowest in per capita terms in the history of the data series, the statement significantly upgraded the assessment of the labour market.
And, while the statement retained the “considerable time” description of how long it would keep rates at zero before hiking, a new brief statement was inserted indicating that the FOMC could bring forward its first policy rate hike relative to expectations (currently in the September-October 2015 time frame) if the data improves better than expected and could delay that first hike if the economy tracks more weakly than expected.
The bull is back in town. Photo: Spencer Platt Thinkstock.com RBNZ waxes dovish
The Reserve Bank of New Zealand was also out with its statement, which saw it removing all reference to further rate hikes. It pointed out a rapid slowdown in housing inflation which it credited to its macro-prudential efforts and extremely pointed rhetoric on the exchange rate, which it described as “unjustified and unsustainable”. NZDUSD fell sharply and AUDNZD was up pushing at a key resistance level around 1.1300.
Looking ahead
This latest FOMC statement puts the USD bull back in the driver’s seat, with the next round of key US data next week the key evidence needed for new highs in the dollar index for the cycle – with EURUSD down through 1.2500 and USDJPY swooping above 110.00, AUDUSD crashing down through 0.8650 and NZDUSD down through 0.7700.
If we don’t immediately see unequivocally strongish-to-outright strong data, the risk would be that we get bogged down in the ranges again, but we’ve already spent weeks in the doldrums, so it is tough to envision that scenario.
One barometer to follow on that note is the trajectory of Fed Funds futures, where the September ’15 contract dipped five ticks yesterday – we’ll need to see that trend continue for the most unequivocal signal that this USD move can power through the levels mentioned above.
Chart: USDJPY
USDJPY looks ready to challenge the 110.00+ highs for the cycle and then some if the coming cycle of US data is supportive for the US dollar. The local support comes in at the recent 108.35 flatline area. 
Source: Saxo Bank
One of the most interesting developments yesterday was perhaps the ability of risk appetite to maintain an even keel despite the more hawkish-sounding Fed, with US equities managing to stay relatively buoyant within the range. Given the fact that we’d just seen a brutal rally unfold over the last couple of weeks, this was an impressive performance and supports the USDJPY view higher in particular until proven otherwise.
Watch out for the German CPI data today, which could swing the euro either way intraday. URUSD has developed significant downside momentum and could even test all the way to 1.2500 today if we get an especially weak data point today.
Chart: EURUSD
The next targets lower for EURUSD are the slowly rising “trendline” currently coming in around 1.2200, but which I don’t find particularly compelling, followed by the hugely significant 1.2000 area, which EURUSD has only closed below once (back in 2010) since 2006.
1.2000 is a monster level that opens up tremendous downside potential if taken out in the months ahead – but let’s take one thing at a time for now. 
Source: Saxo Bank
Economic Data Highlights
- FOMC announced the reduction of asset purchases to zero as expected.
- New Zealand’s RBNZ left rate unchanged at 3.50% as expected
- Australia Sep. HIA New Home Sales out at 0.0% MoM
Upcoming Economic Calendar Highlights (all times GMT)
- Germany Oct. Unemployment Change and Unemployment Rate (0855)
- Eurozone Economic/Industrial/Consumer/Services Confidence (1000)
- US Weekly Initial Jobless Claims (1230)
- US Q3 GDP estimate (1230)
- Germany Oct. Preliminary CPI (1300)
- US Fed’s Yellen to Speak (1300)
- Eurozone ECB’s Linde to Speak (1815)
- New Zealand Sep. Building Permits (2145)
- Japan Sep. Jobless Rate (2330)
- Japan Sep. Overall Household Spending (2330)
- Japan Sep. National CPI (2330)
- UK Oct. GfK Consumer Confidence (0005)
- Australia Q3 PPI (0030)
- Japan Sep. Housing Starts (0500)
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