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USD Range-Bound Ahead Of FOMC

Published 07/29/2015, 07:22 AM
Updated 03/07/2022, 05:10 AM

FOMC Time

Traders globally will be singularly focused on the FOMC meeting this afternoon. Given the importance of this event we anticipate FX markets will shift into tight ranges. The market is currently pricing in a September rate hike (approx 70%). With no press conference or new projections released it will be the statement language in terms of forward guidance that the market will be watching. On this we anticipate the Fed to remain cautiously optimistic (dont expect any significant change). While June retail sales and consumer confidence data disappointed, the overall growth trend, highlighted by a solid durable good read, indicates that 2Q GDP will accelerated above 3.0% (Thursday release). That said weaker commodity prices have damped expectations for inflation to increase and could weigh on Feds potential delivery date. We suspect that markets are too focused on the Fed “lift off” rather than the pace of rate hike cycle. We expect a 25bp FF hike in September but gradual tightening, with plenty of balanced statements, moving forward. This will keep the US yield curve in a flatter shape limiting the upside in USD against G10 currencies. However, EM currencies have a higher sensitivity to US rate movements combined with mounting growth issues, soft commodity prices and high debt load should remain weak against the USD. We remain constructive on the USD based on policy led divergence however, trades will have to remain patient for any significant FX gains.

Japan retail sales collapse again:

Japan June retail sales came in yesterday at a disappointing -0.8% m/m well below the May figure that printed at 1.7% m/m. There is now a growing concern about the efficiency of PM Shinzo Abe’ policies. He is currently failing to end up a period of twenty years of deflation for which he has been elected.

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Indeed, deflation has been happening for the last twenty years and Shinzo Abe is still trying to stimulate the economy through its Abenomics policy which consists in monetary and fiscal stimulus and structural reforms. It has not provided the desired effects and earlier this month the Bank of Japan has cut its GDP growth forecast to 1.7& from 2.0% as well as the core inflation target for 2015 went to 0.7% from 0.8%.

The key for growth is confidence in the economy and for the time being Shinzo Abe has been unable to increase consumer spending despite massive quantitative easing. We now wonder about the true success of those magical arrows.

Furthermore, last year sales tax hike went from 5% to 8% and simply destroyed consumer spending and therefore retail sales. Ironically, giving confidence to Japanese people while punishing their purchasing power was all but a strategic move leading to sustainable growth.

We remain highly bullish on the USD/JPY as it becomes clearer that Abenomics look like more and more of a huge failure. We decently target the year-high at 125.86.

USD/JPY Chart

EUR/USD has decreased and is now targeting 1.1000 again. Hourly resistance lies at 1.1278 (29/06/2015 high). Stronger resistance lies at 1.1436 (18/06/2015 high). Support can be found at 1.0660 (21/04/2015 low). Over the last month, the pair is setting lower highs therefore we remain bearish. In the longer term, the symmetrical triangle from 2010-2014 favors further weakness towards parity. As a result, we view the recent sideways moves as a pause in an underlying declining trend. Key supports can be found at 1.0504 (21/03/2003 low) and 1.0000 (psychological support). Break to the upside would suggest a test of resistance at 1.1534 (03/02/2015 reaction high).

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GBP/USD is moving in either direction. Hourly resistance is given at 1.5803 (24/06/2015 high). Support is given at the 38.2% Fibonacci retracement at 1.5409. Stronger support is given at 1.5330 (08/07/2015 low). We expect the pair to decrease again within the next few days. In the longer term, the technical structure looks like a recovery bottom whose maximum upside potential is given by the strong resistance at 1.6189 (Fibo 61% entrancement).

USD/JPY is increasing slowly. Stronger resistance still lies at 135.15 (14-year high). Hourly support is given by the 38.2% Fibonacci retracement at 122.04. Stronger support is given at 120.41 (08/07/2015 low). A long-term bullish bias is favored as long as the strong support at 115.57 (16/12/2014 low) holds. A gradual rise towards the major resistance at 135.15 (01/02/2002 high) is favored. A key support can be found at 118.18 (16/02/2015 low).

USD/CHF is still in a short-term upside momentum. Hourly support can be found at 0.9151 (18/06/2015 low). The road is still wide open for the pair to challenge stronger resistance at 0.9719 (23/04/2015 high). The pair is gaining momentum to challenge this resistance. In the long-term, there is no sign to suggest the end of the current downtrend. After failure to break above 0.9448 and reinstate bullish trend. As a result, the current weakness is seen as a counter-trend move. Key support can be found 0.8986 (30/01/2015 low).

Resistance and Support:

EUR/USD1.14361.12781.11961.09421.08191.06601.0521

GBP/USD1.59301.58031.57091.54901.53301.51711.5089

USD/CHF1.01290.98630.97190.96150.92440.91510.9072

USD/JPY135.15125.86124.45123.97120.41118.89116.66

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